Bank shares surge 6% on reports of capital injection

IRISH BANK shares surged by 6 per cent yesterday as reports of an imminent capital injection and/or consolidation of Irish banks continued to circulate.

While Bank of Ireland was up by 20 per cent at one stage, it gave up some of its gains in the afternoon to finish the day up by 5.6 per cent, with Anglo Irish Bank the strongest on the day. It added 8.4 per cent to almost touch the €1 level.

However, while the market responded positively to the reports which focused on a group of private equity investors, one broker said that the overall impact of such moves on the market would depend on the terms of the deal reached and who the external investor was.

Moreover, another broker said that private equity was "not the route the market wants to go down".

Nonetheless, pressure to recapitalise continues to mount. In its Banking System Outlook for Ireland report, ratings agency Moodys said that the relatively lower level of capital at some of the banks had left them "less well prepared to enter a more challenging operating environment".

Meanwhile another three international banks yesterday announced higher capital levels, highlighting the new capital standard required for banks post-credit crunch.

In Britian, shareholders of Barclays voted to approve the bank's controversial £7 billion (€8.3 billion) fundraising, which will result in a group of investors from the Middle East, including the Qatar Investment Authority and Sheikh Mansour Bin Zayed Al-Nahyan, a member of Abu Dhabi's royal family, owning about a third of the bank.

Asian bank Standard Chartered launched a £1.8 billion rights issue in an effort to strengthen its balance sheet, while Citigroup became the beneficiary of the largest bail-out in US history yesterday.

It was announced that the US government would inject $20 billion (€15.9 billion) into the bank, as well as guaranteeing $306 billion in high-risk assets.

The Barclays deal will take its Tier-1 ratio up to 11.3 per cent, while Standard's has risen to 7.4 per cent. Citigroup estimated that the cash injection will give it a Tier-1 capital ratio of 14.8 per cent. The core Tier 1 capital ratio at Ireland's three main banks is about 6 per cent.

However, there is a message in the Barclays and Standard Chartered deals for the Irish banks as to how they should go about recapitalising.

The private equity cash injection into Barclays is very expensive - in return for the investment the bank will pay a coupon of 14 per cent over a fixed term running to 2019 - while the Standard Chartered deal was done at a considerable discount - the issue price of £3.90 represents a discount of almost 50 per cent on Friday's closing price.