Thursday 22 February 2018

AIB and BoI need to raise €6.3bn -- analysts

Joe Brennan

The country's two largest banks will need to raise a combined €6.3bn to leave their capital ratios at minimum acceptable levels, as they write down almost €24bn of loans over the course of the financial crisis, according to analysts at Davy.

In a 70-page tome for clients, the broker said it expected Bank of Ireland (BoI) would be able to raise €1bn of the €2.2bn it needs by buying back a large part of its subordinated bonds at deeply discounted prices. Allied Irish Banks (AIB) could shave €2.7bn off its €4.1bn capital needs by selling its 23.5pc stake in US associate M&T and 70.2pc-owned Polish unit Bank Zachodni WBK and through a bond buyback programme.

But Davy analysts Emer Lang and Stephen Lyons warned that a sale of the Polish business "would generate a useful boost to capital in the short term, but retaining it may generate more through (earnings) retentions in the longer term."

Many sector observers believe, however, that Brussels, which is reviewing a restructuring plan for AIB, may demand that the bank dispose of Bank Zachodni, if it has not decided to do so already.

The capital-raising measures outlined by Davy would leave both banks with equity tier one capital ratios of 6pc at the bottom of the economic cycle.


Davy said that in a worst-case scenario, where the banks could not subsequently raise money from investors, the State could end up owning more than 70pc of each. This would occur by way of the Government converting €2bn of its €3.5bn of preference shares in the banks into ordinary shares.

Many international investment banks believe that the two banks would benefit as they push through rate increases across their loan books from current very low levels.

But Davy said that the "politicisation of banking" as a result of the Government's bailouts would hamper their ability to widen their lending margins.

The analysts said that raising interest rates "for fragile borrowers could result in an increase in non-performing loans".

All told, Davy believes AIB's net interest margins will tighten by 0.63 percentage points in the four years to the end of 2011 to a record low of 1.59pc -- weighed down further by high wholesale funding and deposit rates.

BoI's net interest margins should tumble by 0.75 points to 1.32pc over the same period, the analysts said.

Still, they estimate that the banks, buoyed by the transfer of their NAMA loans and fresh recapitalisations, should return to profitability by 2012. This will allow them to use retained earnings to further boost their capital reserves.

Irish Independent

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