State scheme to cost banks 10% of annual profits

BANK GUARANTEE:THE COST of the Government's guarantee scheme to the Irish banks will amount to at least 10 per cent of their annual profits, Minister for Finance Brian Lenihan said on RTÉ's Prime Time last night, writes Simon Carswell, Finance Correspondent.

The Minister said he would publish the draft scheme this evening. The six Irish-owned banks earned combined profits of €6.5 billion in their most recent financial year, which covers most or all of 2007, though most of the banks will record lower profits this year.

Irish bank shares endured a roller-coaster day after the Financial Regulator refused to rule out the possibility that banks may need to raise more capital and revealed for the first time the full exposure of the six guaranteed, Irish-owned banks to speculative lending on construction and property development in Ireland.

The draft bank guarantee scheme will be published this evening, Mr Lenihan said last night.

Irish bank stocks gained in early trading after the US announced plans to take stakes worth up to $250 billion (€183 billion) in financial institutions, but Anglo Irish Bank and AIB later declined.

Anglo Irish Bank closed down 7.4 per cent at €2.12.

AIB fell 7 per cent to €3.20, adding to its 18.8 per cent fall on Monday amid concerns that it may need to raise fresh capital to reach new benchmarks set by the British banks following capital injections by the UK treasury on Monday.

Analysts and brokers struggled to understand why Bank of Ireland rose 7.2 per cent as there are similar concerns that the bank may also need to raise extra capital.

Irish Life Permanent (ILP) rose 16.4 per cent, extending gains made on Monday, as investors have been buoyed by the company's ability to draw a further €1 billion in capital from its life business over the coming years.

ILP does not lend to builders or developers, which has also reassured investors.

The Irish bank guarantee scheme was "potentially helpful" to foreign-owned Irish banks as it improves their ability to raise funding, debt rating agency Moody's said after assessing the extension of the guarantee to five foreign-owned Irish banks.

The agency said that, given the two-year term of the guarantee, it was unlikely to improve the institutions' long-term debt ratings which already take account of the belief that the Government would offer "systemic" support to the Irish banking system.

Emer Lang, analyst at Davy stockbrokers, said that she had thought investors in all three of the main Irish banks would have been relieved with new figures, provided by the regulator, showing the extent of speculative loans to builders and developers.

Ms Lang said she thought investors would have taken comfort from the fact that the banks had most of the loans secured on additional collateral and other sources, in addition to the properties.

Speculative lending accounts for €39.2 billion of the €112 billion total debt owing by builders, developers and property investors.

AIB's share price gives the bank a market worth of €2.8 billion. Comparing this with the value of the bank's stake in US bank MT and its Polish business, Zachodni WBK, Goodbody Stockbrokers said in a research note that the bank's current share price assumes a negative valuation for the rest of the banking group.

Interbank borrowing rates eased following a series of state guarantees and stake-buying in the European and US banks.