Bank of Ireland and AIB make the cut

EUROPEAN BANK STRESS TESTS: IRELAND:BANK OF IRELAND and Allied Irish Banks (AIB) passed the EU stress testing of 91 banks across the region, AIB on the basis that it will raise the €7.4 billion set by the Financial Regulator under its own more rigorous stress test earlier this year.

EU bank regulator, the Committee of European Banking Supervisors (CEBS), set a target of 6 per cent tier-one capital ratio – a measure of a bank’s loss-absorbing reserves relative to assets – after applying possible worst-case losses.

Bank of Ireland and AIB, which represent almost 53 per cent of the State’s retail banking sector, passed the target after applying the stress-case scenario.

The test aimed to restore confidence in the European banking system and prove banks could withstand a double-dip recession and a severe sovereign debt crisis.

Bank of Ireland emerged with a tier-one ratio of 7.8 per cent and AIB with a ratio of 7.4 per cent following the stress-case scenario.

The regulator’s own stress test carried out in the first quarter of the year was more stringent. Expected losses on loans moving to the National Asset Management Agency (Nama) and property investment loans remaining behind at the two banks were also applied under the exercise.

Bank of Ireland had a 7.1 per cent ratio and a capital buffer of €933 million after the regulator applied these losses in the CEBS test, while AIB had a 6.5 per cent ratio and a buffer of €352 million.

The CEBS stress test included a potential 12.8 per cent haircut on Irish sovereign debt, ranked the third-riskiest under the test. Ireland came behind Greece which faced the highest haircut on sovereign debt with 23.1 per cent, and Portugal with 14 per cent.

A discount of 12.3 per cent was applied to Spanish bonds, the next-riskiest after Ireland, and 10.2 per cent on British government debt.

German sovereign debt faced the lowest haircut, 4.7 per cent, based on several factors including the cost of government borrowing across the euro zone at the peak of the sovereign debt crisis in May.

The Irish regulator told Bank of Ireland last March that it must raise €2.66 billion to meet new capital rules after taking account of losses under its stress test, the so-called Prudential Capital Assessment Review (PCAR), which included expected haircuts on Nama loans.

The bank last month completed a capital-raising plan which boosted reserves by €2.9 billion.

AIB is selling stakes in Poland’s BZ WBK, MT in the US and its UK business to meet the regulator’s €7.4 billion capital target.

Minister for Finance Brian Lenihan said AIB also planned to raise capital “from the market through an equity issue – underwritten by the State and international investment banks”.

The regulator was in “close contact” with banks to assess the results of the EU stress tests, their implications and any potential recapitalisation needed, he said.

AIB had a considerably higher level of sovereign debt exposure than rival Bank of Ireland. The bank has €4.1 billion in Government bonds last March but just €41 million of Greek bonds.

It had €1.09 billion of UK sovereign debt and €1.05 billion of Polish government bonds, held primarily for liquidity purposes for their operations in those countries.

AIB held €257 million of Portuguese sovereign debt and €391 million of Spanish state debt.

Bank of Ireland had €1.18 billion of Irish Government debt at the end of March but no Greek, Portuguese or Spanish sovereign debt.

The cost of insuring against default on Bank of Ireland debt – a proxy for measuring risk – fell by 0.23 per cent after the results of the stress test were announced.

AIB rose 6 per cent in trading in New York on the American depository receipt market, while Bank of Ireland climbed 4 per cent.

The regulator now plans to apply the CEBS sovereign debt risks to its stress test of Irish Life Permanent which is under way.