State preparing to fund cash injection into banks
Moody's places AIB and BoI ratings on review as sell-off of shares continues
Goodbody Stockbrokers estimates AIB, Bank of Ireland and Anglo Irish Bank will write off €19bn of bad debts
Related Articles
Wednesday November 19 2008
Banking stocks led a sell-off in the market again yesterday amid mounting speculation the Government is preparing a recapitalisation plan for the sector and as Moody's placed its ratings on Allied Irish Banks and Bank of Ireland on review for a downgrade.
It is understood the Government has accepted that it will have to lead a multi-billion euro cash injection into the banks as they face a slew of bad debt losses within the next few years.
Finance Minister Brian Lenihan held talks with Central Bank governor John Hurley and Financial Regulator chief executive Patrick Neary yesterday as his department prepared its action plan.
Ross Abercromby, a senior analyst at Moody's, said yesterday the new ratings review reflects "the rapid deterioration in the economic environment in Ireland and in the UK is leading to a faster than anticipated deterioration in asset quality in both countries".
Moody's currently has a 'Aa2' long-term rating on both banks, which is two levels below its top-notch 'AAA' stance.
Goodbody Stockbrokers estimates AIB, Bank of Ireland and Anglo Irish Bank will write off €19bn of bad debts -- mainly to residential property developers -- within the next four years. While most of these will be absorbed by the banks' profits, the broker noted that the three lenders currently have core equity -- a key measure of capital reserves -- of €20.5bn on their balance sheets.
Guarantee
The Moody's review came as AIB started 'pre-marketing' of a €1bn to €2bn bond sale -- which would make it the first Irish bank to issue new debt under the government guarantee scheme. "The success -- or otherwise -- of this issue will really give an indication of what the (debt) market thinks of the government guarantee," said one dealer.
The bonds will mature within the two-year lifetime of the guarantee and, therefore, carry a triple-A rating -- in line with that of the State.
Moody's said new business plans, which the seven lenders covered by the scheme must submit to the Financial Regulator tomorrow, will play an important part in its review.
AIB said two weeks ago it would dispose of assets to help bring its core tier one capital ratio from 6.2pc to 7pc.
Analyst were left in no doubt that the lender will put its 24pc stake in US bank M&T on the blocks as an initial step. Shares in M&T have slid 30pc since then. AIB executives signalled on the day of its trading update that a sale of the stake would boost its capital base to the tune of €1.2bn -- the equivalent of 0.85pc of core equity.
Davy analyst Scott Rankin said yesterday that a sale would only boost core equity by 0.5 percentage points.
AIB's shares plunged 17.7pc to €2.18 yesterday, while Anglo became the second bank in as many days to fall below the psychologically important €1 level. The stock closed down 25.1pc at 83c -- its lowest level in over a decade.
Bank of Ireland, meanwhile, managed to regain some of the ground it lost on Monday, adding 12.2pc to 93c.
- Joe Brennan
