Payment holidays help Irish banks contain NPLs

Irish banks have been offering payment holidays to support households and small and medium-sized enterprises (SMEs) hit by the economic fallout from Covid-19, which has kept non-performing loan (NPL) ratios stable, according DBRS Morningstar

Accounts and loans with outstanding payment breaks hit €10bn in July before falling to €3bn in October, according to a report published on November 11.

Irish banks rated by DBRS Morningstar include the Bank of Ireland, Allied Irish Banks and Permanent TSB.

Irish banks' NPL ratios remained stable in Q3 as banks reported that most expired payment break accounts had returned to their regular payment schedule.

However, as the further restrictions hamper growth in Q4, borrowers may require additional financial support, according to Mario De Cicco, Maria Rivas and Pablo Manzano.

“We expect banks' asset quality to deteriorate and NPLs to increase although the final impact will depend on the length of economic shutdown, any further support measures and degree of economic contraction,” the analysts wrote.

Three-to-six month deferrals

In the Republic of Ireland, payment breaks have been implemented at industry level since the outbreak of the pandemic in March.

Irish banks typically provided a three-month deferral of loan principal and interest payments with the possibility of being extended up to six months. But there has been a sizeable reduction of outstanding retails loans with payment breaks in October compared to July as payment breaks reached their three-six months maturity.

According to the banks, the majority of retail customers who requested payment breaks returned to regularly paying interest in October.

Allied Irish reported that 60% of total payment breaks provided have not been extended for with 90% of the accounts returning to their pre-payment break schedule.

In October, loans with outstanding payment breaks represented around 5% of total gross retail loans at Bank of Ireland (down from 18% in July), 3% at Allied Irish (down from 8% in July) and 1% at Permanent TSB (down from 10% in June).

On aggregate, total retail loans with outstanding payment breaks for Irish banks totalled €3.1bn in October, a 68% reduction from the €9.7bn outstanding in July.

In October, the three banks had payment breaks still in place for around 29,000 accounts including households mortgages, SMEs and consumer customers, significantly lower than the 94,000 accounts in July.

Mortgages accounted for the majority of the outstanding value of retail loans on payment break as of October (60% of total), followed by SMEs (36%) and consumers (4%).

NPLs stable in Q3

Irish banks' NPLs remain stable quarter-on-quarter in Q3 as most customers that requested payment breaks had resumed payments.

However, Irish banks have not disclosed any information on the stock of ‘stage 2’ loans – loans at risk of turning bad – at end-Q3.

These loans materially increased in Q2 reflecting the early impact of the pandemic on asset quality.

At end-Q3, Bank of Ireland reported NPLs of €4.5bn, slightly down from €4.6bn at end-Q2.

Bank of Ireland’s NPL ratio remained stable at 5.8% quarter-on-quarter. Allied Irish’s NPLs slightly increased by €0.2bn to €4bn at end-Q3 leading to an NPL ratio of 6.6% compared to 6.3% at end-Q2.

Permanent TSB’s NPLs stood at €1.1bn in October. The NPL ratio increased to 7.7% at end September compared to 6.8% at end-June but the increase was mainly driven by a reduction of gross loans following the disposal of a €1.4bn buy-to-let loan portfolio, the analysts wrote.