European banks must raise capital, says rating agency

EUROPEAN BANKS will need to raise their levels of core capital – the best form of loss-absorbing cash reserves – by two to three percentage points, according to international debt rating agency Fitch.

Figures provided by the agency at a banking conference in Dublin show that Irish banks have the lowest levels of core capital compared with six other European banking systems – France, Germany, the UK, Spain, Italy and the Benelux countries.

Fitch said there was “a paradigm shift” on capital expectations and long-term core capital ratios would be set at 7-9 per cent.

“You would have to expect core capital and tier one capital increasing by three percentage points,” said James Longsdon, managing director of financial institutions at the ratings agency.

Fitch’s figures showed that Irish banks had core capital ratios of less than 6 per cent, below a level of 7 per cent or higher for the six other banking systems surveyed.

Irish banks had the highest level of net impaired loans compared with core capital at the end of June 2009, according to the agency.

Fitch showed that combined net-impaired loans at AIB, Bank of Ireland and Anglo Irish Bank were more than 80 per cent of core capital last June, compared with less than 40 per cent for other European banks.

The agency said this would be “changing quite dramatically” after the National Asset Management Agency [Nama] bought loans from the banks and further recapitalisation. Mr Longsdon said there was still “an awful lot of change” to be factored into Irish bank capital ratios with Nama.

Capital ratios at AIB and Bank of Ireland would improve significantly as they would be moving a combined €39.6 billion in loans off their balance sheets into Nama.

Fitch pointed out that the timing of loan losses would run in tandem with the economic cycle, reinforcing the view that there were further significant losses to come for the banks after the loans were transferred to Nama by the middle of next year.

The agency said that regulators and financial institutions were still monitoring how much capital banks across Europe would need and the quality of that capital.

Fitch showed that impaired loans at the banks compared with operating profits before impairments were sharply higher than in other European banking systems. In comparison, Irish banks had medium operating profit margins.

Mr Longsdon said banks with stronger funding would not have to raise high levels of new capital.

Fitch said losses on loans may peak at 7-10 per cent of overall loans at the UK banks, similar to the last recession in the 1990s.

Mr Longsdon said corporate loan defaults peaked about two quarters after GDP began to grow again, while defaults on personal loans, credit cards and mortgages lagged corporate loans defaults.