AIB and Bank of Ireland among worst performers in stress tests

AIB and Bank of Ireland have fared among the worst financial institutions in a Europe-wide stress test of their capital strength.

Under adverse scenarios applied by the London-based European Banking Authority, AIB would have a fully loaded Common Equity Tier 1 (CET1) ratio of 4.3 per cent at the end of 2018, below the 5.5 per cent level that markets and regulators would typically expect it to hold.

For Bank of Ireland, the equivalent figure would be 6.1 per cent.

This does not mean that the Irish banks have failed the test, as the EBA decided not to use pass-fail terminology in these stress tests, which examined 51 institutions across 15 countries.

Both Irish banks comfortably pass the 5.5 per cent hurdle both for the 2015 year end and under the so-called baseline scenario for the end of 2018.

AIB moved on Friday night to calm concerns by stressing the results of its “transitional” CET1 ratios from the EBA’s tests, which were 15.9 per cent for last year and 7.4 per cent for 2018.

State payment

This ratio is the one that the bank is actually regulated under at present and sources indicated that AIB would not have been allowed to make a €1.76 billion payment to the State on Thursday, to redeem loan notes that were issued as part of its bailout, if regulators were concerned about its financial health.

In a statement AIB said it was “well capitalised” and back “generating capital” and that the tests were based on its 2015 balance sheet strength.

AIB added that it had undergone “fundamental restructuring” in recent years and was now “sustainably profitable”.

However, it remains to be seen if the markets will agree with AIB’s assessment of the EBA’s results, especially as the Government is planning to float 25 per cent of the bank on the main stock markets in 2017.

Bank of Ireland said only that it noted the results of the tests. It was not clear on Friday night if the bank plans to make an announcement to the stock exchange when markets reopen on Monday.

Italy’s Monte dei Paschi and the UK’s Royal Bank of Scotland, which owns Ulster Bank, emerged as the biggest losers in the stress tests.