JP Morgan says AIB and BoI need $17bn capitalisation

ALLIED IRISH Banks (AIB) and Bank of Ireland need $10 billion (€6.8 billion) and $7 billion (€4.8 billion) respectively in capital over the next six months to replenish their capital reserves and repay the Government, according to analysis by US bank JP Morgan.

The Irish lenders were among a group of European banks that the US bank expects will have to raise $78 billion to repay governments and require in additional cash to raise capital ratios to a higher level set across the banking world.

JP Morgan lists AIB and Bank of Ireland as having the second and third largest capital requirements of the European banks surveyed.

German lender Commerzbank has the highest requirements with $17 billion needed to raise capital levels to a minimum core tier-one ratio – a measure of a bank’s ability to absorb losses – of 8 per cent.

JP Morgan estimates that AIB has a core tier-one ratio of 2.6 per cent, while Bank of Ireland has a ratio of 3.1 per cent – well below the 8 per cent level that it believes will become the industry norm.

“We believe a substantial recapitalisation is needed for Irish banks in the medium term as we consider it unrealistic for these banks to be able to operate below industry capital levels and more with the risk of government stakes still standing,” the bank said.

JP Morgan’s estimate of the capital needs at the two Irish banks does not include the State’s €3.5 billion investment in each lender, stating in the analysis that the two Irish banks will also have to raise €7 billion to repay the Government over the next six months.

The figures are also based on the assumption that the banks will face a discount of 30 per cent on loans being sold to the National Asset Management Agency (Nama) when both lenders expect the discount to be lower than this.

Including the Government’s €3.5 billion stakes and a lower 25 per cent discount on Nama-bound loans, JP Morgan estimates that the core tier-one ratios at AIB and Bank of Ireland stand at 6.2 per cent and 7.3 per cent respectively.

On this basis, AIB would require €2.3 billion and Bank of Ireland €800 million to raise their capital ratios to the 8 per cent level.

Bank of Ireland and AIB have until 2014 to repay the €7 billion invested by the Government through preference shares before the State’s 25 per cent shareholding in each bank rises to 125 per cent of their nominal value.

AIB plans to raise €2 billion in capital over 12 to 18 months to cover losses incurred on the sale of €24 billion in loans to Nama.

Bank of Ireland has said that it could raise capital internally or by accessing capital markets.

Some analysts have said that the bank may not require any new capital following the sale of €16 billion in loans to Nama.

Both banks have played down the possibility of raising €1.5 billion before the end of the year to repay the Government and reduce the State’s warrants in the banks from 25 per cent to 15 per cent.

Shares in Bank of Ireland fell 4.5 per cent yesterday, or 14 cent, to €2.94, while AIB climbed 0.6 per cent, or just over 1 cent, to €3.00.

AIB has gained 72 per cent this year, while Bank of Ireland is up 269 per cent since the start of the year.

JP Morgan listed UK bank HSBC as the best capitalised bank with an excess of $40 billion in capital, followed by the Swiss lenders UBS and Credit Suisse, which have $13 billion and $9 billion in excess capital respectively.