AIB and BoI must raise €7.1bn in capital -- SocGen
Analysts with French bank Societe Generale estimate Allied Irish Banks needs to raise €4.4bn and Bank of Ireland an additional €2.7bn to bring their equity capital levels up to standards set by the international markets.
There is growing consensus in the markets that banks will have to achieve an equity ratio of 8pc on the other side of the global downturn. However, it is believed the main two banks will look to recapitalise themselves over the coming months to initially hit 6pc and add to this over time.
In one of the more bullish assessments among a raft of international brokers to take a fresh look at Irish banks recently, SocGen lists a number of reasons "to be more positive on the future of the Irish economy and banking sector".
These include the tough December Budget; high consumer savings rates; a relatively robust export sector; signs of improvement in competitiveness that was lost in recent years; and the liquidity impact expected from the National Asset Management Agency (NAMA) scheme.
The analysts noted that there is a "significant likelihood that the eventual cash call" from AIB will be "much less than €4.4bn", as it has the option of disposing of its stakes in US bank M&T and Polish unit Bank Zachodni WBK.
SocGen is also among the first to raise the prospect of AIB selling its UK business. "With the UK banking sector poised to see up to three new entrants into the market, AIB's UK business could potentially be an acquisition target," SocGen said.
The broker estimates AIB could get €1.2bn for the UK assets and that a sale could boost group equity to the tune of €650m -- largely by way of reducing the group's risk weighted assets.
SocGen initiated coverage of AIB with a 'buy' rating and BoI with a 'hold' stance.
The French broker estimates that AIB will write down €13.6bn of its loan book -- including discounts on its NAMA-bound portfolio -- over the worst four years of the crisis. BoI's provisions should hit €10.9bn over the same period.
It also warned that the speed at which Irish banks will be able to increase their margins will be slower than UK rivals, as new lending remains more subdued and mortgage durations have extended significantly.
Still, SocGen believes the big two banks, by virtue of their market shares in a number of areas, will have increased pricing power as foreign-owned banks work through their own difficulties. Consolidation among second-tier domestic lenders would "also drive pricing power recovery", it said.