Irish banks, routinely a weak performer in European banking stress tests thanks to the long-lasting effects of the 2008 financial crash, fared better than expected when the latest round of tests was unveiled on Friday.
The European Central Bank (ECB) looked at the Irish economy falling more off course than any other in the single currency area by the end of 2025 under adverse scenarios. It also fired a hypothetical 28.3 per cent slump in Irish commercial property and 11.1 per cent drop in house prices into it its forecasting computers.
However, Bank of Ireland came through the wringer with a key capital ratio of 11.7 per cent — compared to the 10.4 per cent euro zone average and a still-respectable 10 per cent reading for AIB.
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The results will, no doubt, embolden the banks when they make their case to regulators about upping returns to shareholders through larger dividends and share buybacks next year.
While Irish banks were trapped during the last round of stress tests in an environment of ultra-low interest rates and muted demand for new loans, they are now among the biggest beneficiaries in Europe from rising official rates, given their relatively higher reliance on interest income.
On-demand accounts
They may have been coming out with improved offers in recent times for certain products for savers. But more than 90 per cent of Irish deposits are in current or on-demand accounts that are earning little or nothing. To boot, AIB and Bank of Ireland have about €60 billion of excess deposits with the Central Bank of Ireland earning, as of last week’s ECB rates hike last week, 3.75 per cent a year.
Bank of Ireland chief executive Myles O’Grady avoided a question on a call with analysts on the prospect of the group paying out 100 per cent of its earnings next year to shareholders, given the pace at which it is building up profits and capital in excess of its target.
A decision on returns will be announced with the company’s annual results early next year, he said. However, he added: “We’ve no desire to hoard capital.”
