Ireland’s four main domestic lenders will post “materially higher” average loan-loss provisions this year as they are forced to take a more conservative and consistent approach to impairments, according to Jonathan McMahon, a central bank official.
While it is “too early to say yet” how individual banks will fare, the overall provisioning level will be higher, McMahon, assistant director general for financial institutions at the Dublin-based central bank, said in an interview today. The forecast excludes losses recorded by banks on loans sold to the National Asset Management Agency, the country’s so-called bad bank, Nicola Faulkner, a central bank spokeswoman, said.
Allied Irish Banks Plc, Bank of Ireland Plc, Irish Life & Permanent Plc and EBS Ltd., which subsequently merged with Allied Irish in July, were ordered to raise 24 billion euros ($33 billion) following a third round of stress tests in March. The four reported a combined 17.6 billion euros of loan losses and provisions last year, including 8.86 billion euros on loans sold to NAMA, according to their annual reports. NAMA transfers were largely completed in 2010.
“Now that the banks have been recapitalized against stress-test scenarios, they are being asked to front load their loan-loss provisioning to clear up their balance sheets as quickly as possible,” said Eamonn Hughes, an analyst with Dublin-based Goodbody Stockbrokers. “In the past, the banks wouldn’t have had the capital to do this.”
Speaking earlier at an event in Dublin, McMahon said that the extent to which banks provide for loan losses are limited by current accounting standards.
“It is important to state that we consider the existing standards an imperfect substitute for an expected-loss approach,” he said. “The absence of an expected-loss standard under International Financial Reporting Standards remains a somewhat troubling omission from the post-crisis reforms announced to date.”
Setting aside provisions for expected losses as early as possible “could mean that the banks break even sooner than anticipated,” said Emer Lang, an analyst with Dublin-based securities firm Davy. Davy estimates Bank of Ireland will post a “modest profit” in 2013, while Allied Irish and Irish Life’s banking unit remain unprofitable through the same year, she said.