AIB WILL need another €13.3 billion to cover potential losses arising from unexpected shocks to the economy, according to yesterday’s “stress test” results.
The bank will also be forced to merge with building society EBS under Government plans to restructure the Irish banking sector. Minister for Finance Michael Noonan said the new-look AIB, incorporating EBS, would be a “largely domestically-focused bank”, thus implying the sale of AIB assets deemed to be “non-core”, such as loan portfolios in the UK, the US and Europe.
Under this scenario the bank will retain its operations in the North and some businesses funded by deposits in Britain, while AIB’s balance sheet should shrink by €19.4 billion by the end of 2013.
A further €13.3 billion for AIB will bring the bank’s bailout total to €20.5 billion, and see the bank accounting for more than half of the €24 billion total capital bill arising from the latest tests.
In a statement, AIB, which is mostly State-owned, said it appreciated the State’s continued support for its business. It also said it was working on “initiatives” to meet customers’ needs and address mortgage problems.
“The board of AIB considers these provisions and reserves will represent a highly prudent and resilient base from which the bank will support its customers and economic revival,” the statement read. The bank added that it had made a previously-unreported €4.5 billion bad debt provision for 2010. It is expected to provide further detail on these and other matters on April 12th.
AIB’s higher share of the €24 billion total reflects the Central Bank’s belief the bank will account for the biggest proportion of loan losses in the sector over coming years.
According to the Central Bank’s assessment, AIB’s losses on residential mortgages could reach €3 billion under a worst-case stress scenario. This would account for 9.9 per cent of the bank’s mortgage book, the biggest percentage of the four lenders examined by the Central Bank.
On the same worst-case basis, AIB’s losses on development loans not transferred to the National Asset Management Agency could rise to €4.5 billion, or 26 per cent of its book, between 2011 and 2013. Its corporate loan losses could amount to €972 million, while loans to small business could account for a further €2.7 billion.
When other loans are added in, AIB’s total loan losses between 2011 and 2013 could amount to €12.6 billion, or 13.4 per cent of its loan book, according to the Central Bank’s most stressed view. This is derived from an in-depth study by US consultants BlackRock, who judged that AIB’s lifetime loan losses could climb to €16.5 billion.
AIB’s own assessment for three-year losses was €10.8 billion, with the bank suggesting the difference was due to “key differences” between the methodology and assumptions used by the parties.
Central Bank governor Prof Patrick Honohan and Mr Noonan both emphasised yesterday, however, that they do not expect these worst-case scenarios to come to pass. “The stress scenarios, while not implausible, are highly unlikely and are not meant to be, nor should they be, interpreted as being forecasts,” said Mr Noonan.
Under a “base” scenario, which reflects EU expectations for the economy, AIB’s loan losses would total €9.5 billion, or 10.2 per cent of its book, up to 2013.
A breakdown of AIB’s latest capital needs shows €10.5 billion is required to meet the Central Bank’s target of Irish banks holding 10.5 per cent in core tier one capital, a further €1.4 billion is needed as a “buffer” against large, unexpected loan losses after 2013, and another €1.4 billion buffer is required in “contingent capital” or debt that converts into equity under certain circumstances.
