Analysis: Stress test a setback for plans to sell State’s AIB stake

Ireland's banks are back in the headlines again, and not for good reasons. Stress tests undertaken by the European Banking Authority (EBA) do not query the current financial health of our two big banks, AIB and Bank of Ireland. But they do suggest that the two Irish banks, and particularly AIB will see big falls in their capital ratios in the event of a prolonged economic downturn.

The main international headlines will be around the Italian bank, Monte Paschi, which announced plans just before the tests to raise new capital and sell off bad loans. However, the news will raise questions about the Government's plans to start the sell down of AIB shares possibly as early as next year, and will lead to some scrutiny by international investors of the entire Irish banking sector.

AIB has questioned the relevance of the top-line capital figures, given the rapidly changing nature of its balance sheet. It says that basing the analysis on a static views of its 2015 figures is not a good guide. And it may well have a point. AIB would surely not have been allowed by the EBA – which now regulates it – to repay €1.8 billion to the exchequer this week, had regulators had any doubt about its current position. And it has also made €1 billion in profit in the last year.

But on any measure the forecast performance of the two Irish banks , if a recession does hit, come towards the bottom of the pile. If the measure is the so-called fully loaded CET1 ratio – the toughest measure – Ireland’s banking sector comprised of the two big banks ended up with the lowest ratio of European countries covered, of 5.21 per cent. Even on a so-called transitional basis, allowing for the room banks are given to meet new requirements, the combined ratio of the two Irish banks after an economic shock is just over 7.5 per cent, the second lowest of the countries in the test.

Still, the headlines are unwelcome for the two Irish banks and particularly AIB. Market analysts will now be poring through the small print. One of the problems this time is that the EBA published a pile of figures at 9pm on a Friday night, leaving banks little time to explain their position before the weekend. For such a complicated exercise it was a poor way to communicate.