Sunday 22 April 2018

Banks emerge with €16bn hole as ‘endgame’ nears

Bank of Ireland may require up to €3bn according to analysts. Photo: Bloomberg News
Bank of Ireland may require up to €3bn according to analysts. Photo: Bloomberg News

Dara Doyle

Irish banks may be left with a €16bn hole as the Government’s plan to salvage the financial system unfolds next week.

The state agency set up to absorb loans from Bank of Ireland, Allied Irish Banks and other lenders may say on March 29 how much it will pay for them. Analysts then expect the regulator to set out new capital requirements for the banks.

“We are into the endgame now,” said Kevin McConnell, head of research at Bloxham Stockbrokers. “By the end of the week, we should know how much capital they will need.”

AIB may require €4.4bn and Bank of Ireland €3bn, depending on the financial regulator’s decision, McConnell estimated.

Anglo Irish Bank, nationalized last year, will need as much as €9bn, Chief Executive Officer Mike Aynsley said this week.

Property values in the country have fallen by half from a peak in 2007 and soaring bad debts are threatening to topple the banks. The National Asset Management Agency aims to turn the situation around by purging lenders of toxic loans.

The agency, a so-called bad bank, is taking over loans with a book value of €80bn, about half the size of the Irish economy.

The Government said last year it expects to pay about 70pc of the value to reflect the drop in property prices.

Discounted debt

AIB will take a 33pc discount on around €23bn worth of loans it is selling, analysts at NCB Stockbrokers forecast.

Bank of Ireland, which is scheduled to publish full-year results on March 30, is facing a discount of between 28pc and 37pc, NCB said, depending on the quality and quantity of the assets it sells.

The discounts on the loans will eat into the banks’ capital as the country’s new financial watchdog, Matthew Elderfield, sets out the new levels the lenders should hold.

AIB had an equity core tier 1 capital ratio of 5pc at the end of 2009. Bank of Ireland had a 6.6pc ratio on September 30. Those ratios exclude a Government investment of €3.5bn in each bank, made at the start of 2009.

Every 1pc extra in the core capital ratio pushes AIB’s requirement up by around €900m and Bank of Ireland’s by €800m, McConnell said.

After the new capital ratios are determined, the focus will turn to how the banks will raise that money.

Selling assets

AIB Managing Director Colm Doherty said on March 2 the bank will explore “self-help” options, such as the sale of assets, before turning to investors or the government for cash.

“If the banks can’t raise the capital themselves, then the Government will have to step up,” said Emer Lang at Davy, a Dublin-based securities firm.

“But there’s far too many variables to say that at the moment.” AIB, which has units in Poland and the US “can raise a lot by selling assets, for example,” she said.

Finance Minister Brian Lenihan announced the creation of the asset agency in April, two months after he pumped the €7bn into the two biggest banks.

The minister, who is also pushing lenders Irish Nationwide and EBS to merge, will make a statement next week on the future of the country’s banking system.

The Government also put €4bn into Anglo, which is likely to need more aid. The bank will report earnings next week for the 15 months through December 2009 after a loss of €3.8bn in the six months through March 2009. The state is the only source of help for the lender.

“The taxpayer is on the hook at this point,” said Brian Lucey, associate professor of finance at Trinity College. “There are no shareholders left, and the remaining bondholders can’t be touched.”


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