EBS

EBS BUILDING Society will be folded into AIB as part of a “second pillar” in the Irish banking system.

Minister for Finance Michael Noonan said combining the two would “strengthen the franchises” of the banks. The merged institution would be “a largely domestically focused bank”, he told the Dáil.

Customers of AIB and EBS should continue to do business with their bank as before, Mr Noonan added.

In a statement, EBS welcomed the Minister’s decision. “The society understands and accepts the Government’s need to reconfigure the banking system to support the economy and will play its part in rebuilding the sector,” it said. AIB also welcomed the proposal and said it would “update the market in due course as details are finalised”.

The Government called off the proposed sale of EBS to the private equity consortium Cardinal on Wednesday, claiming its bid was “not sufficiently commercially attractive to the State”.

Instead, the planned “second pillar” formed by the State-controlled AIB and EBS merger will exist alongside the “first pillar”, Bank of Ireland. The merger is subject to State aid and regulatory approval.

EBS requires a capital injection of €1.5 billion to cope with expected losses on its lending portfolio, the Central Bank announced yesterday in the results of its stress test exercise.

This breaks down into €1.2 billion of required capital, a further €100 million that will act as an additional capital “buffer” and another €200 million in the form of contingent capital.

The Central Bank projects that between 2011 and 2013 EBS will make a loss of at least €848 million on its residential mortgage portfolio. This could rise to as high as €1.38 billion under the “stress” scenario, based on figures derived from a review of the banking system by BlackRock.

On a percentage basis, this means EBS would have to write off between 5.3 per cent and 8.7 per cent of its residential mortgage portfolio.

In both the “base” and the “stress” scenario, EBS is the second worst affected bank in terms of the proportion of bad loans in its residential mortgage book, with only AIB estimated to face higher percentage losses in this category.

EBS also faces between €127 million and €197 million in losses on its commercial real estate loans. As with all the lenders, the expected percentage losses in this category of lending is expected to be in the double digits – up to 23.4 per cent in EBS’s case.

This brings the total projected three-year losses at EBS to a range of €975 million to €1.57 billion, or 5.8 per cent and 9.4 per cent of its portfolio.

Under deleveraging plans agreed with the Central Bank, the EBS balance sheet is earmarked to shrink by €4.9 billion. Total net loans at EBS are destined to fall from €16.4 billion to €11.5 billion by the end of 2013, in accordance with the Central Bank’s “right-sizing” programme.

This deleveraging will involve the gradual run-off and disposal of non-core assets. The core focus of EBS’s business will be mortgage lending, but even here an element of “natural” deleveraging will be achieved over the next three years because the number of customers making their final mortgage repayments exceeds the forecasted number of new customers.

Using traditional banking methodology, EBS’s own forecasts provided for losses of just €759 million, rising to a little more than €1 billion. Under its more conservative analysis, BlackRock calculates the lifetime loan losses on EBS loans, after the shrinking of its balance sheet, will be between €1.56 billion and €2.7 billion. This amounts to between 9.3 per cent and 16.3 per cent of its portfolio.