'Penal' level of capital needed to bombproof balance sheet
ALLIED Irish Banks was last night trying to convince the Government it could launch a multi-billion euro share sale in the autumn on top of selling some of its foreign assets in a last-ditch attempt to fight off majority state ownership.
The Irish Independent has learned that the Financial Regulator is now looking for AIB to raise up to €7bn in equity by the end of the year to 'bombproof' its balance sheet.
Banking analysts had originally estimated that AIB would need €4.5bn.
The bank will also be required to hold a further €1bn on its balance sheet but not as equity.
The much-bigger-than-expected capital requirements are the result of three key developments:
- The new financial watchdog Matthew Elderfield is demanding that lenders hit higher capital targets, which means they have to put aside extra money to cover losses.
- The banks will also have to undergo massive stress tests of banks' loan books to ensure that they can cope with further loan defaults.
- And NAMA discounts are running much deeper than originally anticipated.
AIB would not comment beyond a stock market announcement, which confirmed it was in talks with the regulator "in order to agree its capital requirements".
Some observers described as "penal" the level of capital AIB is being required to raise.
"You're basically looking at an Armageddon scenario where the regulator sees the bank writing off €17bn over loans over four years -- wiping out its existing equity reserves," one analyst said.
All banks and building societies have strongly resisted the new capital targets. But Mr Elderfield has made it clear he is not for turning as he seeks to make the industry among the best-capitalised in Europe.
Bank of Ireland will need to raise about €3bn, according to sources.
About half of this is expected to come from the State as part of a massive capital-raising deal.
The State is poised to take a 40pc stake in BoI, while it is speculated that it could end up with a holding of as much as 70pc in AIB.
It is believed AIB's first batch of NAMA loans face a discount in excess of 40pc, while BoI's is running north of 35pc.
Mr Elderfield is insisting the banks make sure they raise enough cash this year so that their equity capital ratios, a key measure of lender's financial stability, do not fall below 7pc at the bottom of the cycle.
It is believed they are being forced to hit an 8pc ratio by the end of 2011. AIB managing director Colm Doherty's argument the bank could reach a 5pc figure through asset sales this year, before rising to 7pc through retained earnings before 2012, has failed to win over the regulator.
The financial watchdog has also called on the banks to stress test their non-NAMA loans against much worse unemployment, economic and house price figures than economists are currently predicting.
The stress test has focused, in particular, on their mortgage books and property and construction loans below the €5m cut-off point for inclusion in the bad bank.
It is understood AIB has come out pretty badly in the test of its remaining property and construction loans, which stand at more than €12bn.
Rather than go out and raise fresh money to pump into AIB and BoI, the Government will look, in the first instance, to convert part of its existing €3.5bn investment in the banks into actual ordinary shares.
It is likely to convert all its investment in AIB, though the timing of this is not yet clear.
The bank is expected to try and flog its stake in US bank M&T as well as its UK business banking arm as quickly as possible. A major question mark remains over whether AIB's valuable Polish unit Bank Zachodni WBK will be put on the block.
Brussels is likely to have the final say on this over the coming weeks, as it finalises a review of the bank's restructuring plan.