AIB and BoI advised to raise capital quickly


AIB AND Bank of Ireland (BoI) should seek to raise new capital before Nama is in place, according to a new report from Merrion Capital. The banks are estimated to need over €9 billion in new equity between them, and analysts at Merrion believe that, with economic recovery likely to be slow, AIB and BoI should seek to raise capital sooner rather than later.

The analysts say credit losses are expected to remain high for both banks, and they should avail of the market appetite for bank equity recapitalisations “at the earliest possible opportunity”.

“Based on our forecasts, we expect AIB and BoI to have end 2010/11 equity Tier I ratios of 3.3 per cent and 3.5 per cent respectively after the impact of transferring assets to Nama. This assumes a 25 per cent discount on AIB’s Nama transfers and 18 per cent for BoI,” the analysts say.

To rebuild capital to 6 per cent equity Tier I levels at end of 2010 and for the full year 2011, “on our forecasts, we estimate AIB requires €2.9 billion of new common equity and BoI requires €2.4 billion. To get to 8 per cent by the end of 2010 would require an incremental €2 billion each – the required timing to reach 8 per cent is debatable, but earnings retentions through 2012 appear unlikely to fully satisfy the banks’ needs.”

Merrion said both banks should also move to refinance their €1.5 billion tranches of Government preference shares before the end of the year. “Clearly, the Irish banks need to be well-capitalised, and current international market standards are moving to an 8 per cent core Tier 1 capital ratio, predominately comprised of common equity, well above the forecast levels post-Nama. At current share prices, there is a significant cost to the shareholders of AIB and BoI if the €1.5 billion of tranches of Government preferred shares and the attached warrants are not redeemed before year end.”