Saturday 25 October 2014

Probe may force banks to fix balance sheets before year end

Published 10/10/2013 | 05:00

The Central Bank has voiced concern about a 9.3 billion euro mortgage debt mountain in the main Irish banks
The three main banks may have to plug any financial holes they have

The three main State-backed banks may have to plug any financial holes uncovered in the 'Balance Sheet Assessments' by the end of the year.

If any major new issues at the banks come to light the public is likely to learn about them through stock market announcements.

The behind-closed-doors reviews at AIB, Bank of Ireland and Permanent TSB began in late summer and are part of the process aimed at seeing Ireland exit the bailout at the end of this year.

The results will go to Central Bank and European authorities.

However, stock markets and bond investors will have to be told of any issues thrown up by the reviews through full public disclosures, the Irish Independent has learnt.

"Any findings that are material to the banks' valuations would have to be disclosed to the market, given these are listed institutions," according to Eamon Hughes of Goodbody Stockbrokers.

The balance sheet reviews by experts from Boston Consulting are focused on the strength of the banks as they stand today.

They include reviewing how loans are classified – as good or bad – how future loan losses are being provided for, and how the banks reflect their so-called risk weighted assets (RWA) – valuations of assets that take into account potential risks to actually recovering value.

Review

Initial results are due this month, with final results due by the end of next month.

The balance sheet review stops short of the kind of full stress testing that led to massive bank rescues here in recent years, but it is not an academic exercise.

Any issue uncovered cannot be ignored by the banks or regulators.

Increases in banks' impairment charges will have a direct bearing on the level of losses, or profits for the year for example.

"We believe any potential under-provisioning or inaccuracies exposed during the reviews will have to be corrected for the 2013 year-end accounts," said analyst Ciaran Callaghan of Merrion Stockbrokers.

Like Eamon Hughes at Goodbody, he does not see a big risk that any of the three banks will need a big capital injection, following the current review.

Even in an extreme case – where big losses potentially emerge because some loans are reclassified, the resulting loss of capital could be cured by converting preference shares or contingent convertible bonds into shares, according to Mr Callaghan.

The State would take a hit in that scenario in the form of losses on old rescue "investments" in the banks such as preference shares and convertible bonds but would be unlikely to have to write any new cheques.

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