Market relief as test results boost AIB and BoI shares
SHARES in Ireland's two biggest banks surged as much as 6pc yesterday as the market delivered a firm endorsement of their performance in last week's stress tests.
Both Bank of Ireland and AIB finished in the bottom third of the 84 banks that passed the Europe-wide exercise, but their trading greatly out-performed a 1.5pc rise across Europe's financial index.
AIB rose by 6.7pc in early trade, before settling down to close up just over 4pc. Bank of Ireland got off to a more muted start, but the stock closed up almost 6pc.
Trading levels were high, with about 29 million Bank of Ireland shares changing hands in Dublin and London yesterday, against last week's average daily volumes of 24 million. Some 4.6 million AIB shares were traded between London -- against last week's average daily volumes of 2 million.
"Some sell-side houses had indicated that one or both of AIB and Bank of Ireland would probably fail, so there is potential for relief there," a London-based analyst said.
In a note to clients, Davy's analyst Emer Lang stressed that the Irish banks had likely faced tougher tests than many of their peers, as our Financial Regulator applied harsher loan losses to reflect the property crash.
While the official European result for AIB showed the bank had €352m of capital headroom when the various stresses were applied, that figure would have come in at €986m had the regulator not intervened. For BoI the headroom figure swells from €933m to €1.5bn when the "unadjusted" result of the stress test is calculated, according to Ms Lang's calculations.
She said the disclosures from the Financial Regulator had been a "particular" boost to Ireland's banks yesterday, comments echoed by other Dublin analysts.
"The international media, particularly in the US, appears to be taking a more jaundiced view ( 'European Union Flunks Test for Stress Test') but the markets appear happy to shrug this off," Ms Lang added.
The surge in shares came despite an analysis by Citigroup putting AIB in a group of 24 that would have failed the tests had European regulators applied more stringent criteria around sovereign debt.
Citigroup's said AIB would have scored a tier one ratio of 5.5pc, marginally below the pass rate of 6pc, if the test had applied haircuts to banks' entire sovereign debt portfolios and not just the portion on their trading books.
Describing the banks' performance as "surprising" in view of the "fabricated" nature of the stress-tests, a Dublin trader suggested the gains wouldn't see out the week.