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June 28, 2018

IMF published its staff report and selected issues report in the context of the 2018 Article IV consultation with Ireland. Directors welcomed the improvements in domestic banks’ financial soundness, but underlined the need to accelerate balance sheet repair and prepare for the challenges posed by Brexit. Directors also encouraged downsizing the government’s stakes in the banking system, as market conditions allow. The authorities emphasized that non-performing loan (NPL) resolution remains a key priority.

The staff report highlighted that banks have strengthened their capital buffers and improved asset quality, but the ratio of NPLs remains well above the EU average. The domestic banking system has further improved its resilience to shocks. Bank profitability has remained broadly stable and above the euro area average. However, the introduction of regulatory changes, such as the minimum requirement for own funds and eligible liabilities (MREL) and the potential impact of Brexit are expected to add some pressure to bank profitability; however, the impact of these headwinds might be felt gradually over time. NPLs have declined across all loan categories but their relatively high level continues to weigh on bank balance sheets and operations. The ongoing tracker mortgage examination is unprecedented and costly for the banking sector.

The report notes that steps to further improve bank asset quality would help the banking sector to refocus on its core functions and better support growth. Significant progress has been made with respect to distressed corporate/commercial real estate (CRE) loans. Yet, mortgage arrears declined at a reduced pace owing to limited creditor-borrower engagement and lengthy legal proceedings. Consequently, the amount of mortgages in deep arrears (over 720 days) remains elevated. Priority should be given to enhancing supervisory efforts, accelerating legal proceedings, and strengthening borrower-creditor engagement. Specific and binding guidelines on NPL write-offs should be adopted, including on increasing loan-loss provisions.

Additionally, the staff report mentions that Brexit preparations in the financial sector should continue. Domestic banks are highly exposed to the British economy, given their direct lending to the UK corporates and households as well as indirectly through their exposure to small and medium-size enterprises (SMEs) that export to the UK or use British inputs. Contingency plan of banks should be reviewed to ensure that their business models are suitable to respond to a material change in economic conditions. A persistent reduction of NPLs, accompanied with conservative collateral valuation, would improve the resilience of banks to a possible slowdown of the British economy and deterioration in Irish companies’ repayment capacity. Given the strong Ireland-UK linkages in the insurance sector, which include sale of insurance products, cross-border reinsurance, and outsourced services providers, a close engagement with insurance companies is also needed to improve their readiness to a possible change in the regulatory landscape and mitigate contract continuity risk.

The selected issues report assesses the business cycle in Ireland. Next, it offers an overview of the impact of international tax reforms on Ireland. Finally, the report examines the synchronization of the Irish returns on CRE properties with those of peers to better understand the importance of external factors in explaining the high volatility of CRE returns in recent years.  

 

Related Links 

Keywords: Europe, Ireland, Banking, NPLs, Article IV, Brexit, IMF

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