AIB, BoI may need capital in 'extreme stress' situation

BANK OF Ireland and AIB are among six European banks that might require additional capital under an "extreme stress" situation, according to US stockbroker and investment bank Keefe, Bruyette & Woods (KBW).

Stress tests on the loan books of 68 European banks covered by its research indicated these six banks could require a combined €8 billion to bring their equity tier one ratios over 4 per cent "under an extreme stress case scenario", KBW analyst Andrew Stimpson said.

The US Treasury announced last week that its stress tests used a measure of 4 per cent at the end of 2010 as a measure of a bank's capital adequacy.

KBW said more than half of the €8 billion would be required by Germany's Commerzbank. AIB could require an additional €1.1 billion and Bank of Ireland an extra €634 million, the report estimated. Sweden's Swedbank may require €1.1 billion, Denmark's Danske Bank €285 million and Italy's Banco Popolare €233 million.

"In reality, more banks could need to raise capital as our stress test only covers traditional loan portfolios and does not stress for higher losses on securities portfolios," Mr Stimpson said.

KBW suggests the minimum threshold for core one capital ratio is likely to be considerably higher than 4 per cent, as banks seek additional capital to guard against a ratings downgrade. "Longer term, we continue to believe that banks will require larger capital buffers, but that this will be built up over several years organically, through lower dividends or buybacks."

Bank of Ireland this week overtook rival AIB to become the largest Irish bank in terms of market capitalisation, as the share price of both banks enjoyed significant gains. Bank of Ireland closed at €1.28 yesterday with a market cap of €1.25 billion after a gain of almost one-third last week. AIB closed at €1.17 with a market cap of €1.1 billion.

Next week, AIB shareholders will vote at an extraordinary general meeting on whether to approve the Government's €3.5 billion recapitalisation of the bank. AIB is due to release an interim statement in mid-May.

Following a Government stress test of AIB's loan book, it has already agreed to raise a further €1.5 billion in capital.

A spokeswoman for Bank of Ireland said the lender had been recapitalised recently by the Government and was now adequately capitalised.

AIB has lent more aggressively to the development sector and as a result is expected to transfer a greater proportion of loans to the National Asset Management Agency (Nama).

Separately, Irish Nationwide Building Society has sold €750 million of Government-guaranteed bonds due in September 2010, a banker involved in the transaction said. The 3.5 per cent notes were priced to yield 200 basis points more than the benchmark mid-swap rate, the banker said.