Irish Banks’ non-performing loans to rise as government support ends: Fitch

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reland’s two largest banks’ – both significant providers of asset finance – will see an increase in their non-performing loans in the coming quarters as support measures during the pandemic come to an end, Fitch Ratings said.

However, the rating agency expects asset quality deterioration to be much less severe than in the aftermath of the 2008 financial crisis.

AIB Group Plc reported a gross non-performing exposure ratio of 7.3% at end-2020, up from 5.4% at end-2019. Bank of Ireland Group‘s ratio rose to 5.7% from 4.4%.

The increases for both banks were partly due to a change in the definition of defaults and did not reflect a real underlying credit deterioration. Loan-loss coverage levels generally strengthened across loan classes, mitigating the higher non-performing exposures ratios.

The vast majority of payment holidays finished by end of February 2021, and in over 85% of cases, borrowers had returned to pre-pandemic payment arrangements – a level well above banks’ initial expectations.

Fitch said it believes this reflects the unprecedented level of government support channelled to individuals and businesses during the pandemic. Ireland’s various support schemes, including unemployment and other subsidy schemes for individuals as well as grant schemes for businesses, amounted to nearly 20% of gross national income.

Businesses were also supported by widespread rent and tax deferrals. Cash accumulated by borrowers has led to a big increase in banking sector deposits (€13bn in January to November 2020), which has supported debt servicing since the end of the payment holidays.