Severe downturn would mean AIB capital dips below euro average

The Republic’s two biggest banks have enough capital to withstand a severe European downturn over the coming years, even though AIB’s capital levels would end up marginally below the euro-zone average as a result, according to the results of banking stress tests released on Friday.

Regulators assessed how banks could cope with an adverse scenario — deemed to be hypothetical but plausible — of the euro-zone economy contracting 5.9 per cent over three years, through 2025, as persistently high commodity prices and difficult global financial conditions hit households and businesses.

The specific adverse scenario for the Irish economy included a 3.8 per cent slump in gross domestic product over the period, a 11.1 per cent decline in house prices and 28.3 per cent collapse in commercial property prices.

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In the worst-case scenario, 98 euro-zone banks tested would see their so-called common equity tier 1 capital ratio (CET1) — a key measure of a bank’s financial stability — would fall from 15.2 per cent to 10.4 per cent over the three years, according to the European Central Bank (ECB).

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AIB’s ratio would decline from 16.3 per cent to 10 per cent under a worst-case scenario, leaving it marginally below the euro-zone average. Under a baseline scenario, its capital level would actually rise to 18.7 per cent.

‘Stronger profitability’

Bank of Ireland’s CET1 ratio would fall from 15.7 per cent to 11.7 per cent in a severe test, but increase to 21.4 per cent in a baseline scenario.

“Capital depletion [across the euro zone] at the end of the three-year horizon was lower than in previous stress tests,” the ECB said. “This was mainly due to banks overall being in better shape going into the exercise, with higher-quality assets and stronger profitability. For some banks, the quality of their loan portfolio had improved significantly since 2021.”

Bank stress tests became a feature on both sides of the Atlantic after the 2008 global financial crisis.

AIB chief financial officer Donal Galvin said the “hypothetical adverse scenario demonstrates our high capital base and capital resilience in the face of one of the most severe” adverse circumstances in European stress tests to date.

Bank of Ireland highlighted that its better performance than the wider euro-zone average in the latest stress tests marks an improvement from the last assessment in 2021, when it fared worse. “This improved performance reflects actions the group has taken to enhance its business model and the improved resilience of the group’s capital to stress scenarios,” it said.