Warning over possibility of further bank capitalisations

Additional capital needed might be sourced ‘from private sector or ESM’

Further injections of capital into AIB, Bank of Ireland and Permanent TSB "might prove unavoidable" the Irish Fiscal Advisory Council has warned in its latest assessment of the public finances.

The council added that given the stressed nature of the State’s finances it would be “desirable” that any additional capital needed be “sourced from the private sector or the ESM [European Stability Mechanism] if possible”.

“However, given the importance of adequately capitalised banks to a well-functioning credit system, which may require a continuing cushion relative to whatever are the minima set by the European-wide regulatory authorities , further injections might prove unavoidable,” the council added.

The advisory body produced an update of the performance of the three Irish banks relative to the losses projected in the 2011 Financial Measures Programme (FMP) by the Central Bank of Ireland.

Based on figures to June 2013, it shows that actual losses realised to date have exceeded base levels as predicted by the Central Bank and moved closer to those of the three-year stress scenario set out in the FMP.

Under the stress scenario, Bank of Ireland was at 96.9 per cent, AIB was at 80.1 per cent while PTSB was at 108.4 per cent. This gave an average of 92.2 per cent.

Stress case scenario losses over the three years were estimated by the Central Bank at €27.7 billion – the December 2010 stock of provision of €9.9 billion and anticipated loan impairment charges to the end of 2013 of €17.8 billion.

The council’s analysis showed that the three banks had reported about €54.3 billion in loan impairments relative to their combined gross loan books of €214.1 billion as of June 2013.

“While impairments now stand at close to 26 per cent of total gross loans in the three main banks, they appear to be rising at a slower pace, as of the first six months of 2013,” the council noted.

A decision on whether Irish banks will require additional capital can only be made once the European Central Bank has completed its stress tests next year.

The full criteria for these tests has yet to be determined and the results are not expected before November 2014.

Minister for Finance Michael Noonan told the Dáil this week that there was "no evidence" that the ECB stress tests or the current asset quality review being conducted by the Central Bank of Ireland would "generate any additional capital requirements for our banks".

Mr Noonan said a number of options were open to the banks if any capital shortfalls arose. “Access to capital markets, be it debt or equity for banks, is far better now than it has been for a number of years,” he said.

“Banks can also generate capital internally by becoming more efficient and becoming more profitable. The ESM . . . is another potential source of capital for banks and there is still negotiation to take place at euro group to agree the terms of that facility which will be available after the Single Supervisory Mechanism has been put in place.”

Commenting on the findings of the report, Prof John McHale, chairman of the council, said: “We review the figures as are available and our assessment is along the lines of the Minister’s that it’s unlikely that there is going to be significant new capital needs for the banking sector next year, even though we certainly can’t be definitive about that until the comprehensive review is done.

“Hopefully, any extra capital that is required will be able to come from private sources, and the recent bond sales [both €500 million] by PTSB and AIB are positive indicators that that private capital will be forthcoming.”