After the denial, horrible reality
The past twelve months saw the banks gradually come out of denial to face up to the issues that led to a collapse in their share prices in 2007 and the need for the State guarantee in 2008. This year is shaping up to be 'make or break' time for the beleaguered sector. Joe Brennan outlines the key banking themes to look out for in 2010.
Finance Minister Brian Lenihan's estimate last September that the banks face a 30pc discount on €77bn of loans bound for the National Asset Management Agency (NAMA) now appears to have been a tad optimistic.
Several factors now suggest they will have to take a tighter 'haircut' on loans as they move across to the State's 'bad bank' over the next six months.
The original estimate is premised on the assets backed by the loans were originally worth €88bn, including developers' equity, which has since been wiped out -- but only carried a market value of €47bn three months ago.
Since then, anecdotal evidence suggests that market prices have dropped even further, with leading estate agents CB Richard Ellis arguing that a new 80pc windfall tax on property, a ban on upward-only rent review contracts for commercial property and recent flooding compound the issue.
Over the past few months, the country's two top banks, who account for just over half the loans being dumped with NAMA, have also rowed back on previous comments that their NAMA-related writedowns would be below the 30pc average.
Since then, analysts revisited their forecasts, with Goodbody Stockbrokers now pencilling in a 26.5pc discount at Bank of Ireland, compared to 18pc previously. It hiked its AIB haircut from 25pc to 33pc.
Every percentage movement represents a €160m and €240m hit for BoI and AIB, respectively.
It is hoped the banks will have a firmer handle on how they will be affected by the time NAMA takes over the loans of the country's biggest 10 developers this month.
The deeper the NAMA discounts, the more banks need to raise to rebuild their balance sheets.
Merrion Capital currently estimates AIB will need to raise €4.4bn, while BoI will need an extra €2.8bn to bring their equity capital ratios up to 8pc of assets -- the emerging market consensus of the level of reserves banks will need to hold in future.
Analysts reckon AIB would be able to generate about €500m of equity from the sale of its 23.5pc stake in US lender M&T and release about €2bn of capital from a disposal of its Polish unit Bank Zachodni WBK (through gains and a lowering of its assets).
AIB is loath to flog its 70.2pc-owned Polish unit, but may be left with little choice as it seeks to plug a gaping hole in its balance sheet -- particularly as it, and other banks, face a second wave of losses on loans remaining on their books after NAMA. BoI has less obvious assets which could be easily sold.
The ability of both banks to raise money from 'rights issues' is hugely dependent on future market sentiment, what level their shares are trading at, and whether the new bosses of both banks can market a credible recovery story to investors.
It is unlikely either would be able to sell shares without the Government guaranteeing -- or underwriting -- to buy any stock that is not taken up by shareholders. But rather than put fresh cash into the banks, it is understood the Government plans to offer to convert some of its existing €3.5bn investment in each, held by the way of preference shares, into ordinary shares.
It is desperate to avoid 100pc nationalisation of the two groups -- but majority ownership cannot be ruled out.
The taxpayer is the only recourse for Anglo, which Lenihan has indicated may need a further €4bn; EBS, which requires up to a €400m bailout; and Irish Nationwide, which needs as much as €4bn.
SPAIN'S Joaquin Almunia is set to become the most powerful figure in Ireland banking when he takes over as EU Competition Commissioner later this month.
AIB, BoI and Anglo have each filed restructuring plans with Brussels in recent months, necessitated by their combined €11bn bailouts to date.
They do not face an easy ride, judging by the tough sanctions the EU has imposed on other rescued banks across Europe in recent months -- with large asset sales the order of the day at the behest of Brussels.
But leading ratings agency Moody's has said that given the small size of the Irish market "it may be more difficult to sell assets to any potential new entrant into the market, especially as the foreign-owned banks already operating in the country have all retrenched to a certain degree."