Banks shares pricing in worst case scenario of €6bn in stress test losses – analysts

European Banking Authority defers examinations to 2021

Shares in AIB and Bank of Ireland, which have slumped in recent weeks amid the spread of Covid-19, are now pricing in an unlikely event of the Republic's two biggest banks racking up more than€6 billion of bad loan losses in the coming years, according to analysts and traders.

That's in line with a worst-case scenario envisaged under European banking stress tests that took place in 2018. The European Banking Authority decided last week to defer a fresh set of stress tests that were due to take place this year to 2021, to allow the sector cope with the economic shock caused the coronavirus.


AIB has seen three-quarters of its market value wiped away since the start of this year, while Bank of Ireland’s shares have fallen by about two-thirds, as investors fret about banks facing a surge in bad loans as the coronavirus wreaks havoc on the Irish and wider global economies.

"In our view, a longer-term multi-year stress, akin to the EBA stress test, is now being priced in over a sharp V-shaped stress lasting one or two quarters," said Davy analysts Stephen Lyons and Diarmaid Sheridan in a report published on Thursday on the effects of Covid-19 on the Irish banking system, which was one of the worst hit globally by the financial crisis.


A V-shaped recession is when an economy falls and recovers quickly.

The Davy reports suggests, however, that AIB faces €1.64 billion of bad debt charges between now and 2022, including the analysts existing base case for bad loans that would normally be expected to occur and an additional €618 million of losses that may stem from the global pandemic.

On the same basis, Bank of Ireland could have to set aside €1.69 billion of bad debt provisions. The figure includes a potential €424 million of losses resulting from the coronavirus crisis.

The analysis indicates that the banks are well positioned to cope with even a worst-case scenario, as they have 3-4 times the level of equity capital sitting on their balance sheets to absorb shock losses compared to their position before the financial crisis.

AIB has €7.2 billion of loans out to sectors most at risk from the impact of Covid-19, including hotels, pubs, retail and wholesale companies and transport. That equates to 11.6 per cent of the company’s gross loans, according to the analysts.


Bank of Ireland has €3.6 billion of exposure to at-risk sectors, representing 4.5 per cent of total loans.

The Davy analysts have also factored in implications for banks’ mortgage portfolios and personal loans into their so-called scenario modelling.

The country’s five mainstream banks signed up to a temporary industry-wide stay on legal proceedings and repossessions, as well as an offer to payments holiday to homeowners and businesses affected by the Covid-19 pandemic. Both measures are currently set to last for up to three months.

European regulators are coming under mounting pressure to ease a new accounting rule – known as IFRS 9 – introduced in recent years that requires banks to set aside bad debt provisions once they expect loans to run into problems. Previously, banks were generally only allowed to make such provisions once a loan had soured.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times