Government should write off €3.5bn bank rescue loan – report
The Government should write off a €3.5bn rescue loan to AIB by converting the debt into shares in the bank, according to Merrion Capital.
In a wide-ranging report on all the main banks, Merrion Capital says €3.5bn of so-called preferred shares the State holds in AIB should be converted into equity "to enhance the bank's viability".
However, with taxpayers already owning almost all of the shares in the bank, any debt-for-equity swap would not materially increase the State holding in the bank.
Merrion Capital says it expects AIB to break even next year.
Bank of Ireland may try to repay its €1.8bn of Government rescue loans – also in the form of preference shares – by refinancing the debt on the markets.
The report by analyst Ciaran Callaghan says banks here have enough capital to cope with anticipated mortgage losses and to come through so-called stress tests next year.
Recovery for the banks would be boosted if they are freed to cut the tax bills on future profits by using "deferred tax assets" gained as a result of losses racked up during the crash, it said.
Banks that were able to shift risky loans to NAMA are restricted in how they offset future profits against historic losses for tax purposes, which forces them to keep the "assets" on their books.
The report says loan impairment charges across the main banks will rise to €27bn by the end of the year.
That is very close to the so-called "stress scenario" considered in 2011 stress-case assumptions.
However, it falls short of that scenario and banks are a lot better placed to cope with the losses, thanks to better-than-expected savings from the sell-off of so-called "non-core" assets.
Still, the outlook for the banking sector on the whole remains difficult, the report said.
Credit conditions remain tight and the shrinking of balance sheets means banks' interest-earning assets continue to decline, hurting income, the report said.
If state-owned AIB and Permanent TSB did require extra capital then €2bn of so-called convertible contingent capital (CoCo) bonds, not fresh cash, will be the first source tapped, it said.