Irish banks set to 'benefit' from Greek drama
Published 03/02/2010 | 05:00
Analysts at Royal Bank of Canada (RBC) yesterday re-iterated that Irish banks were in a "vegetative state", but said they may benefit from the financial crisis being played out in Greece.
The broker's debt analysts said the banks should be helped as Greece's economic woes weakens the euro -- stimulating export activity and leading to a decline in corporate and SME defaults.
"Secondly, a weaker euro may bring ECB rate hikes forward and lead to an increase in net interest income in Irish banks," they said.
"While this may weaken the quality of the banks' mortgage books, they said that "net-net, the Greek drama is likely to be Irish bank positive."
RBC first lambasted Irish banks for being in a "vegetative state" last August, as they survived on "life support" from the ECB.
The analysts said that this remains the case, like other banks across the European Union.
"Debt maturities remain short and ECB financing remains critical to the continued operations of the Irish banks," they said.
RBC estimates that Allied Irish Banks and Bank of Ireland will end up writing off almost a combined €25bn of bad loans over the worst two years of the crisis.
It believes AIB will need to raise €1.9bn and BoI would require €1.7bn to keep their equity capital ratios at a minimum acceptable level of 4pc, as their combined profits before writedowns only amount to €7.7bn over the period.
In a worst-case scenario, RBC sees the two banks writing off €32.5bn of loans, requiring €11.4bn of fresh equity to maintain a 4pc equity ratio.
Still, most financial market observers believe that banks globally will have to increase these key ratios to 8pc over the coming years.
The analysts have advised clients to buy both AIB and BoI's senior unsecured bonds, as they are currently trading at an unwarranted deep discount to Irish Government debt.
"We believe that AIB and BoI are 'too big to fail' for the Irish banking system, and will be supported as needed," they said.
But they had a dimmer view of Anglo Irish Bank's senior bonds, as they await the outcome of the European Commission's ruling on the nationalised group's restructuring plan.
Some ratings agencies have already raised questions about how Anglo's senior bondholders may be treated by Brussels.