Irish bank shares volatile after €24bn recapitalisation

Fri, Apr 1, 2011, 01:00

There was mixed reaction on the market today to the Government's plan for a €24 billion recapitalisation of the country's main lenders.

While bank shares were volatile, ratings agency Standard & Poors downgraded Ireland by one level, but said the outlook was now stable. Fitch also said it was reviewing its ratings, and indicated there would be a possible downgrade in the near term.

Shares in Bank of Ireland surged on the Dublin market after the bank said it planned to raise additional capital from existing shareholders and capital markets in an attempt to avoid State control.

In a statement this morning, Bank of Ireland said it was working with its advisers to meet the equity capital requirement through capital management initiatives, other capital markets sources, and support from existing shareholders.

Shares in the bank finished up 41 per cent at 31 cent by close.

AIB began the session by falling as low as 14.1 cent, but reversed the losses and by 9.09am was trading 27 per cent higher at 24 cent. This later fell back to 20.3 cent, a 7.4 per cent rise before closing at 21 cent.

Irish Life and Permanent was hardest hit on the Dublin market today as its shares plunged nearly 59 per cent to a closing price of 16 cent. Earlier in the session, it hit a low of 11 cent. The company has not required State aid to date but the stress tests yesterday found it needs an additional €4 billion in capital.

The Government yesterday agreed to a recapitalise the main Irish banks without attempting to force senior bondholders to share the burden.

It will be the fifth bailout of Irish banks since 2008 and brings the total State support to €70 billion. The governor of the Central Bank, Patrick Honohan, yesterday described the Irish banking crisis as one of the most expensive in history.

The latest banking bill followed stress tests by the Central Bank to assess the ability of the banks to cope with unexpected shocks.

The tests, which focused on mortgages, considered the impact of €9.5 billion in bad debts on mortgages of €140 billion at the banks under a worst-case scenario. House prices would fall 60 per cent from peak, under this scenario, with this year alone seeing a 17 per cent drop.

Losses over the life of the mortgages were assessed to be €16.9 billion under this scenario.

Goodbody economist Dermot O'Leary said the publication of the stress test results and the plans for restructuring of the banking sector was the "most important milestone" in returning the sector to health, but warned liquidity would still be an issue.

"The rigorous analysis and scale of published detail provides an important added layer of transparency that was missing in previous tests in Europe in general and in Ireland in particular. We would see these as a step in the right direction but further help from Europe is likely to be required," he said.

"With significant capital buffers going to be in place in the banks, solvency should not be a concern. However, liquidity is still an issue; the absence of an announcement by the ECB on a longer-term liquidity facility for the Irish banking system was a disappointment. However, we would not rule out the possibility of it just yet."

The spread between Irish bonds and the benchmark German bund narrowed this afternoon to 6.66 per cent, with the yield on the Irish 10-year note at 10.05 per cent.

Taoiseach Enda Kenny said last night it would not be “reasonable or logical” to go after the bondholders in “live banks” which depended on the markets for funding. He said the Government had decided to reconstitute the Irish banking sector, with the two main banks, Bank of Ireland and AIB, becoming two “pillar banks” which will be largely funded in Ireland and which will sell their foreign assets over time.

The latest bailout will effectively nationalise the banks, pushing the last two lenders to avoid Government control – Bank of Ireland and Irish Life and Permanent – into majority State ownership.

AIB was found to require €13.3 billion under the tests, while Bank of Ireland required €5.2 billion, Irish Life and Permanent €4 billion and the building society, EBS €1.5 billion.

Only two banks will emerge from the crisis following the Governments restructuring plans to break from the country’s “toxic banking past”. EBS will be merged into AIB to form a second banking “pillar” to rival Bank of Ireland. Irish Life and Permanent will be broken up. Anglo Irish Bank and Irish Nationwide will be wound down.

"Only Bank of Ireland retains a reasonable prospect of recreating an equity investment case in the near term," Davy analyst Barry Dixon said in a note this morning.

Minister for Finance Michael Noonan today said the "debate is over" on the possibility of imposing losses on senior bond holders in the two main lenders. Speaking on RTÉ's Morning Ireland, Mr Noonan said the ECB remained opposed to burden sharing.

The Government has not obtained any concessions from the European Central Bank over the support it provides to the banks. It had hoped the ECB - which is propping up the banking system with short-term loans of €100 billion - would allow banks convert them into medium-term borrowing.

Today, Germany's finance ministry said the results of the stress test are "no cause for alarm".