DUBLIN, Nov 11 (Reuters) - Irish banks must tread carefully before they begin to write back provisions on bad loans as a result of a recovering property market and not bow to demands to bolster profits, a senior central bank official said on Tuesday.
Irish property prices are climbing following a devastating crash and are now 40 percent below a 2007 high versus the 55 percent peak-to-trough assumption Irish banks have provided for, prompting some to raise the prospect of write-backs.
Following a crisis that brought Irish banks to the verge of collapse, lenders should be aware that the recognition of appropriate levels of provisions is critical to stabilising non-performing loans, Sharon Donnery, director of credit institutions supervision at the central bank, said.
“Whilst there have been improvements in certain key parameters such as house prices, there are still unreliably low levels of activity to have high levels of confidence in changing assumptions,” Donnery told a banking conference.
“The ability to write back provisions must be reflective of a conservative view and therefore the timing and extent of any write-backs must be balanced extremely carefully.
“Demands to bolster profits, reserves and capital cannot be allowed to destabilise the progress on debt resolution.”
Allied Irish Banks, which said on Monday that it had taken an overall net provision write-back in the first nine months of the year, became the first domestic bank to revise its peak-to-trough assumption to 52 percent in July.
Permanent tsb (PTSB), the only Irish lender to fail last month’s European stress tests, said it had also reduced the amount of money set aside to cover losses on bad loans in the third quarter, though it has kept the conservative price assumptions.
“It would be a significant backwards and destabilising step if a bank had to reverse course and re-recognise provisions in the coming years. We will continue to strongly challenge our banks to make sure that the appropriate balance is struck,” Donnery said.
Reporting by Padraic Halpin; editing by Jason Neely