Irish banks have demonstrated stability, despite their internal and external challenges. In a published report, S&P Global Ratings said that it expects that nonperforming assets (NPAs) will reduce further in 2019, given the regulatory pressure to reduce the ratio of problem loans and the existence of a market for portfolio sales. Bank of Ireland and Allied Irish Banks, the two "pillar" banks, have made the most progress toward reducing their NPAs.
The quality of the sector's loan book is typically weaker than in many other EU countries, due to the concentration in real estate and popularity of tracker mortgages. Previously, reversal of provisions has supported profits; this is unlikely to continue.
Raising the currently modest proportion of fees and commissions in the mix is critical for Irish banks to offset interest margin pressure, especially for non-pillar banks. We do not expect banks to be able to expand their net interest margins further, given the competitive market dynamics, low interest rates, and gradual build up in banks' stock of minimum requirements for own funds and eligible liabilities (MREL), which will weigh on the future cost of funding.
Capitalisation remains at relatively strong levels, but is set to decline marginally as loan books expand and dividend distribution policies are unlikely to change. Irish banks have full access to capital markets and are on track with their planned issuance of MREL-eligible instruments.