BoI eyeballs regulator on bad-loan provisions

A Mexican standoff emerged yesterday between Bank of Ireland and its regulator, the Central Bank, following the publication of the results of its recent balance-sheet assessment.

Bank of Ireland, AIB and Permanent TSB were all put through their paces recently to test the quality of their assets and whether they might need more capital or should take additional provisions for bad loans.

It was chief executive officer Richie Boucher’s bad luck that Bank of Ireland was the only one of the three required to publish the results, which, in its case, amount to extra provisions of €1.3 billion. The reasons for this are eye-watering. On a more positive note, Bank of Ireland passed the capital test with flying colours.

The Central Bank is keeping schtum for now on the results of the assessments while AIB and Permanent TSB – both of which are more than 99 per cent owned by the State and trade on the junior ESM exchange in Dublin – said only that they were adequately capitalised.

It’s hard to imagine that neither AIB nor PTSB had adverse provisioning findings made against them, given their balance sheets are more challenged than Bank of Ireland’s. But we’ll have to wait to get the full story.

At a banking conference in Dublin yesterday, Central Bank governor Patrick Honohan said the assessments were not about "grand statements" but were exercises to satisfy the EU-IMF bailout troika before the State exits its bailout programme and were a stepping stone towards more comprehensive pan-European capital stress tests in 2014.

The troika initially wanted full-scale capital stress tests of the Irish banks but the Central Bank wasn’t keen given that they would have to participate in the pan-European tests next year. So the balance sheet assessments were agreed as a compromise.

Bank of Ireland said it was in “ongoing negotiations” with the regulator on the provisioning issues, which it disputes. That’s code for them having a spat. They’ve butted heads before on such issues since the financial crisis blew up in 2008.

The good news for Boucher was that the share price dropped by only 3 per cent after a strong run in recent weeks. A few years ago such results would have savaged Irish bank shares.

Ireland’s exit from the bailout and Boucher’s sales pitch to investors over the past few years has obviously calmed the market’s view of the bank’s prospects.

So much so that Bank of Ireland is pressing on with plans to raise up to €600 million so that it can buy back the Government’s preference shares before a clause kicks in next March that would increase the cost to the bank.

If successful it will be another step along the road by Boucher of getting the State out of his hair.