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Ratings giant Fitch has mixed message for Republic of Ireland's banks

By Michael Cogley

The Republic's biggest banks will come under increased competition as the economy recovers, face big bills to keep up with the transition to digital banking, and will be hit by Brexit.

Ratings giant Fitch reaffirmed its positive outlook for both First Trust parent AIB and Bank of Ireland, however it said the banks will face challenges from increased competition, low-interest rates, and further investment into their digital offerings.

Last July AIB and Bank of Ireland came out among the weakest large EU lenders following formal stress tests by the European Banking Authority.

Fitch yesterday held Bank of Ireland's long-term issuer default rating (IDR) and viability rating (VR) at 'BBB-' and 'bbb-' and kept AIB's IDR and VR at 'BB+' and 'bb+'.

The banks' IDRs represent their standalone strength, while VRs take into account the likelihood that the Irish State would support them through any crisis.

The agency hinted at potential upgrades for the banks on the horizon but said asset quality of both firms remains weak.

"Our assessment of asset quality also factors in a high proportion of forborne loans at both banks, still large exposures to low-yielding loans, including tracker mortgages, and defaulted but not impaired loans, all of which add up to a high proportion of the banks' balance sheets.

"We expect asset quality improvements to continue as a result of a supportive Irish economy, continued demand for properties in Ireland and the proactive stance being taken by management to continue to reduce these legacy assets," Fitch said in a note on Tuesday.

Brexit remains a concern for both banks with Richie Boucher-led Bank of Ireland taking a hit from the weak sterling in the third quarter of the year.

Almost half of the bank's loan book is in the UK, and has said income had remained steady during the period but that the currency translation has had an effect.

"Sterling weakness vis-a-vis the euro impacts the group's reported balance sheet assets and liabilities as well as the euro equivalent of our sterling profits," the bank said in October.

Fitch said the UK's departure from the EU could slow improvements in both banks' asset quality and capitalisation.

"The extent of any weakening of the Irish operating environment, triggered by a slowdown of GDP growth in the UK, sterling depreciation, and potential future trade barriers, will only become clear over time as the EU-UK negotiations develop," Fitch said.

The ratings agency also said that Bank of Ireland's UK arm remains vulnerable to the downturn in UK real estate prices. Bank of Ireland's UK lending, which is primarily made up of retail mortgages and commercial real estate loans, account for 40% of its overall loan portfolio.

AIB, which is significantly less exposed to the UK real estate market, has moved to significantly reduce its bad debts.

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