Sunday 22 October 2017

Fears of further cash injections for AIB and BoI after warnings

Shares tumble in 'big two' banks after Fitch and Goldman issue alerts on cash need

AIB headquarters in Ballsbridge
AIB headquarters in Ballsbridge
Donal O'Donovan

Donal O'Donovan

TWO of the world's most influential financial institutions issued separate warnings yesterday about the country's banks, pushing down share prices and raising fears of further cash injections.

Rating agency Fitch said the main banks could need further money from taxpayers as losses continue to mount up well into the future.

Fitch said the State would be willing to make up any shortfall if further money was needed for AIB or Bank of Ireland in particular while UK-owned Royal Bank of Scotland would continue to support Ulster Bank if Ireland's third-biggest lender needed financial aid.

"The Fitch ratings for the banks factor in a very high level of state support – as much as the state coffers can afford.

"We wouldn't see the Government allowing these banks to fail," analyst Denxil de Bie told the Irish Independent.

The latest warning that the banking system remains fragile was echoed by Goldman Sachs. The US firm said it expected Bank of Ireland to only break even in 2014 and start making profits again in 2015.

Goldman cut its rating on Bank of Ireland shares to 'sell' after recent share price gains closed the discount that Bank of Ireland was trading at compared to its European peers.

BoI is viewed as the strongest of the banks and the one that will return to profit first.

Bank shares tumbled on the forecasts. Shares in Bank of Ireland closed down more than 4pc at 17.25 cents each yesterday. It is the only one of the main Irish-owned banks not in majority state control.

Shares in Permanent TSB finished the day down more than 6pc while AIB shares were down almost 1.4pc.

In a review of all the main banks, Fitch said it believed it would be 2015 before the banks returned to profitability, even on an "operational" or a day-to-day basis that did not count the historic losses run up during the boom.

Cost cutting and price rises for customers are expected to continue until then.

Fitch does not expect so-called stress tests of the banks due to take place later this year to present a challenge for AIB and Bank of Ireland, not least because the tests will be set by the Central Bank here.

However, Europe-wide stress tests dubbed the Prudential Capital Assessment Review and due in 2014, could be a challenge.

RULES

The test could mean resetting the ground rules on how much capital banks need to set aside to cope with potential losses.

Banks that continue to make losses and have balance sheets stuffed with boom-era mortgages and property loans could be vulnerable under that scenario.

"Further capital may be required before the banks can contemplate a future independent of state support," Fitch said.

In the meantime, banks may have to set aside extra cash this year and next to cope with mortgage losses because of the targets set by the Central Bank for dealing with the numbers of home loans in arrears.

Tackling the mortgage crisis could also drive down house prices, but is a necessary step towards re-establishing a sustainable banking system, the rating agency added.

The end of the state guarantee, gradual return to the markets and better-than-expected results from AIB and Bank of Ireland's sales of non-core units and loans as well as the wider stabilisation of the Irish economy have all been positive for the banks, Fitch said.

Irish Independent

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