BANK of Ireland has been told it needs to set aside an extra €1.1bn to cope with potential losses on bad mortgages and business loans after an independent review of the bank's books.
It's a rare recent knock for Bank of Ireland which has been powering ahead in the markets this year – evidenced by a surging share price and its ability to complete regular bond deals.
In a statement, the bank said it was financially able to absorb the potential losses identified in the review without seeking fresh cash from investors or from the State. It indicated it would challenge some of the negative findings of the independent assessment, which was overseen by the Central Bank.
AIB and Permanent TSB both refused to release the results of similar reviews of their finances, but both banks insisted that their financial reserves remained above the minimum levels set by regulators, even after the probe.
Finance Minister Michael Noonan said "there was no great surprise" in the results.
"We always expected that some of the buffers we put in two years ago would be eaten away as debt was crystallised and that has happened," he said yesterday.
Bank of Ireland is likely to have been more public with its results because the bank is close to doing a deal to sell shares and needs to be transparent with investors, according to Ciaran Callaghan, an analyst at Merrion Capital.
The bank was told it needed to set aside an extra €360m to cover potential losses on Irish mortgages, an extra €486m in case of extra losses on business loans and €547m to cope with the loss on defaulted loans. That is in addition to cash previously set aside to cope with losses.
The Central Bank also increased BoI's so-called risk-weighted assets (RWA) by €6.8bn. The RWA is a calculation of the value of loans and other assets which takes account of the risk that some of the debt won't be paid.
All told, the review found Bank of Ireland's "Core Tier 1 capital adequacy ratio" – which is a standard measure of a bank's strength – fell to 9.85pc from 13.8pc.
The reviews took place in October and November but are based on the position of the bank at the end of June
It is the first part of a Europe-wide health check of the banking sector due to get under way next year. The process began here earlier than in the rest of Europe so that the first phase of the Irish checks would be completed before the end of the EU/IMF bailout.
Shares in Bank of Ireland fell 3pc yesterday to 27.7 cents each. The bank said it was in talks with the Central Bank about the results.
"The outcome of this engagement cannot be anticipated with certainty and actions taken following engagement with the Central Bank of Ireland may adversely impact capital ratios," the bank said in a statement.
Analysts are taking that as a sign the bank disagrees with at least some of the findings.
Sources said AIB is also set to challenge some of the findings of its review. It is understood the bank does not plan to release any details about the findings until that process is completed.
In a statement, AIB said it would consider the findings of the review in the preparation of its full-year results and that, based on an initial assessment, it believed it remained well capitalised and in excess of minimum regulatory requirements.
Mr Noonan also warned that taxpayers could end up footing the bill for future bank rescues, unless a deal was agreed to share the costs. Ireland is pushing for a deal on a European banking union that includes using the eurozone's rescue fund, the European Stability Mechanism (ESM), to finance bank rescues, not national governments.
EU Commissioner Vitor Constancio said a European banking union would help get to a situation where two businesses anywhere in Europe with a similar credit standing should have equal access loans.
They were both speaking at a banking conference in Dublin organised by the Institute of International and European Affairs.