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Bulletin: Industry Risk Trend for BICRA On Ireland Revised To Positive On Stronger Profitability

This report does not constitute a rating action.

DUBLIN (S&P Global Ratings) July 23, 2024--S&P Global Ratings today said it revised its Banking Industry Country Risk Assessment (BICRA) industry risk trend for Ireland (AA/Stable/A-1+) to positive from stable following a review. The positive trend reflects our expectation that profitability prospects for Irish banks remain solid after returns improved in 2023 thanks to higher interest rates and market consolidation.

We maintained the BICRA group classification at '3', with an economic risk score of '3' and industry risk score of '4' (on a scale from '1' to '10', '1' being the strongest). Revising the industry risk score to '3' from '4' by itself wouldn't change Ireland's BICRA group score or its anchor (currently at 'bbb+'). Therefore, the industry risk trend revision has no immediate ratings impact on Irish banks.

Irish banks' profitability prospects should remain solid despite an expected gradual decline in interest rates.   Domestic returns on equity (ROEs) for Irish banks improved to about 14% in 2023 from the average for 2018-2022 of about 6% (excluding losses reported in 2020 due to significant COVID-19-related provisions). Our forecasts point to domestic ROEs for Irish banks at above 12% in 2024 and about 12% in 2025. Anticipated interest rate declines will put some pressure on earnings. However, expected growth in fee income and structural hedges will support banks' earnings while funding costs will likely remain contained thanks to a large share of cheap retail deposits. We see the profitability improvement as structural, rather than just cyclical, because of market consolidation over the past few years. The exit of two important players (Ulster Bank and KBC Bank Ireland) provided remaining domestic banks with the larger economies of scale that were missing for years and now support stronger earnings capacity. Domestic banks also focus on an increasing share of more stable income sources (not vulnerable to interest rate changes) through increased asset management proposition, brokerage businesses, and partnership with insurance companies, although they are still far from where banks in other systems are.

Structural efficiency improvement is yet to emerge.   Over the past five years, domestic banks improved their cost-to-income ratios to just below 50% in 2023 from about 70% in 2021. Revenue growth was a key factor behind the ratio improvement. Despite Irish banks' strong focus on efficiency, expense in absolute terms grew significantly over the past two years, owing to staff increases required to onboard a large number of clients transferring from exiting banks, the introduction of health and other benefits as well as variable pay to employees, and ongoing investments in IT systems and automation aimed at improving cost efficiency. Enhancing cost efficiencies through optimization of operating structures is critical for Irish banks to sustain robust profitability, especially as interest rates return to normal levels.

Our assessment of the economic risks Irish banks face is unchanged.   We expect growth of Ireland's gross national income (GNI*), a measure of underlying domestic economic activity, to improve to about 2.1% in 2024 from 1.2% in 2023 and remain above eurozone GDP growth of 0.7%. The labor market will remain tight, with unemployment at about 4.0% in 2024-2025. In addition, the private sector has meaningfully reduced its leverage over more than a decade, placing households and corporates in a good position to face potential economic uncertainty (total private debt has fallen to about 60% of GNI* at end-2023 from 92% at end-2018). We expect asset quality metrics to stay near target levels (with NPLs of about 3%) and credit costs to remain within the through-the-cycle level of 20-30 basis points of average loans.

Ireland--BICRA score snapshot*
To From
BICRA group 3 3
Economic risk 3 3
Economic resilience Low Low
Economic imbalances Intermediate risk Intermediate risk
Credit risk in the economy Intermediate risk Intermediate risk
Trend Stable Stable
Industry risk 4 4
Institutional framework Intermediate risk Intermediate risk
Competitive dynamics High risk High risk
Systemwide funding Low Low
Trend Positive Stable
Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores are on a scale from 1 (lowest risk) to 10 (highest risk). For more details on our BICRA scores on banking industries across the globe, please see "Banking Industry Country Risk Assessment Update," published monthly on RatingsDirect.
Primary Credit Analyst:Anastasia Turdyeva, Dublin + (353)1 568 0622;
anastasia.turdyeva@spglobal.com
Secondary Contact:Letizia Conversano, Paris + 353 (0)1 568 0615;
letizia.conversano@spglobal.com

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