Business Irish

Wednesday 26 July 2017

Brokers are more relaxed on banking needs

Laura Noonan and Emmet Oliver

THE latest 'stress tests' could show banks need as little as €10bn to deal with future losses, far less than is commonly believed, Dolmen Stockbrokers said yesterday.

Davy meanwhile said Ireland may not need to borrow any additional money to pay for the fresh capital as there may be enough available via the National Pension Reserve Fund.

It this is the case Ireland will be protected and credit downgrades avoided, said a note from Davy's chief bond strategist Donal O'Mahony. The pension fund and other cash resources of €17.5bn are available as part of the IMF-EU programme and Davy said this might be enough on its own, meaning no "incremental borrowing needs''.

The comments come before Thursday's announcement on how much extra cash must be pumped into AIB, Bank of Ireland, Irish Life & Permanent and EBS.

Some had been speculating the bailout's cost might exceed the maximum €35bn allowed by Ireland's EU/IMF financial package.

"We can't see that happening," said Dolmen's Ryan McGrath, who yesterday sent a note to clients saying he "expected" the bailout to come in at €20bn to €25bn.

The figure encompasses both the amount needed to fireproof the banks against future losses, and the cost of selling off bank assets so institutions can hit targets set in the EU/IMF deal.

Losses

Mr McGrath said he believed the PCAR, which deals with future losses, could trigger a bailout of just €10bn.

Research out from fellow stockbrokers Davy last week suggested the PCAR exercise could see the banks need as much as €24bn.

The PLAR element of the stress tests which deals with assets sales could see banks' book losses of €10 to €15bn, according to Dolmen's analysis.

"The risk would very much be to the downside there," Mr McGrath said, stressing that the figure could be significantly lower if the European Central Bank steps in with a new funding line for the banks.

That funding line would essentially give the banks more time to sell off assets, so they wouldn't have to crystallise the massive losses that would incur in a fire sale.

Mr McGrath declined to break down how the €20bn to €25bn cost would be spread across the four institutions.

In its note, Dolmen also tackle the issue of 'burning the bondholders', pointing out that "unfortunately" such an action "doesn't solve" the banking crisis since there are so few bonds outstanding.

Irish banks only owe about €20bn to bondholders who aren't protected by a government guarantee or by assets offered up as security for the bonds.

Dolmen suggests that splitting the banks into 'core' and 'non core' units "starts the Irish system healing itself and moving forward without causing significant problems for the State".

Irish Independent

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