AIB, BoI unlikely to pass EU stress test - analyst


AIB AND Bank of Ireland are likely to be among 20 banks that will fail EU tests to see how well European financial institutions can cope with losses on loans and government debts, one analyst predicted yesterday.

The Committee of European Banking Supervisors (CEBS) plans to test 91 banks, including AIB and Bank of Ireland, to see how well-positioned they are to stand up to losses on loans to national governments and other debts.

The exercise is designed to ease investor fears that EU banks are at risk if heavily indebted countries such as Greece fail to repay loans, and because of their exposure to the recession.

Matt Spick, London-based analyst with Deutsche Bank, named AIB and Bank of Ireland as among a number of institutions he believes unlikely to meet the criteria set by the tests.

The others include Germany’s Commerzbank and Bank of Greece, as well as Spanish and Italian lenders. The tests will focus on so-called Tier 1 capital ratios, which are based on the proportion of capital to loans, and measure a bank’s ability to absorb losses.

The ratio should be 6 per cent – that is, Tier 1 capital, such as banks’ own shares, should at least equal 6 per cent of the loan book after testing.

The test will look at different scenarios, such as an increased risk of national governments defaulting on their bonds and lower-than-forecast economic growth.

Mr Spick made his comments despite the fact that the Irish banks passed tests carried out by the Financial Regulator that were said to have set much tougher criteria than those that CEBS will apply.

AIB pointed out yesterday that the bank has to raise €7.4 billion to meet the much tougher standards laid down by the Irish regulator, and pointed out that this process is already under way.

The bank is selling its Polish, US, British and Northern Irish businesses to help raise the money.

Bank of Ireland recently raised €3 billion from the capital markets to boost its reserves. The CEBS tests will not take into account any further fundraising that the banks involved may be planning.

Despite the analyst’s comments, investors seemed to think that the news was good for both Irish banks. AIB gained 2.3 per cent to close at 95.2 cent on the Dublin market. Bank of Ireland added almost 7 per cent to close at 71.3 cent.

European bank shares rose roughly in line with overall markets, in a sign the test criteria were not worse than markets had been expecting.

Investors have been shaken by worries about sovereign debt losses, more bad debts and doubts about the health of the unlisted bank sector.

However, some commentators remained critical, and said that the test will not go far enough towards establishing the scale of the risks facing European banks.

“Stress should be a worst-case scenario and this is not a worst-case scenario by any stretch of the imagination . . . There’s a very real possibility of debt restructurings having to take place for sovereign debt,” said Andrew Lim, analyst at Matrix.

“Short term, the market is positive on the fact that most of the banks should pass it. But longer term, investors will come to the conclusion that the tests weren’t onerous enough.”

Bankers and regulators said the stress scenario on Greek sovereign debt had been set at 17 per cent for banks’ trading books, with additional stresses imposed on the banking book, where investments are held to maturity. “That would increase the stress to 20-30 per cent in total,” one banker said.

Portuguese sovereign debt would attract an 8 per cent trading book haircut, with 5 per cent for Spain. The haircut on German debt would be negligible.

A team of Credit Suisse analysts led by Daniel Davies said that the real test of the system would be EU governments’ willingness to inject fresh capital into banks which fail the test. The CEBS will publish the results of the test on July 23rd.

– (Additional reporting by Bloomberg, Reuters, Financial Timesservice)