Banks might need another €3.3bn

THE TWO largest banks, Allied Irish Banks (AIB) and Bank of Ireland, may need an additional €3.3 billion in capital, with “a high probability” that the Government will take majority ownership in both, according to analysts at Citigroup.

The purchase of bad property loans by State-owned Nama, the National Asset Management Agency, could crystallise losses of €7.9 billion at AIB and €5 billion at Bank of Ireland this year, Citi said, leaving AIB requiring an additional €2.1 billion in capital and Bank of Ireland €1.2 billion.

Raising this level of capital could lead to the State taking a 73 per cent stake in AIB and 64 per cent in Bank of Ireland, Citi said.

The analysts said AIB and Bank of Ireland could transfer €29.7 billion and €20.3 billion of loans to Nama, representing 23 per cent and 14 per cent of their respective loan books, while the loans from the two banks would comprise about 60 per cent of the agency’s assets.

Citi estimates that the banks will sell the loans at a discount of about 25 per cent on book value.

In another report, Merrion Stockbrokers said discounts of greater than 25 per cent on the loans would virtually wipe out the capital bases of the two banks. It described as “optimistic” average discounts of over 20 per cent on development loans and 10 per cent on the remaining loans to be transferred. It said AIB and Bank of Ireland may need a combined €2.2 billion in extra capital to replenish their reserves to regulatory levels based on a 20 per cent discount.

AIB’s share price fell 3.6 per cent yesterday, while Bank of Ireland closed down 6.3 per cent.

Twenty leading academic economists have criticised the Government’s recapitalisation and bad bank plan and called for the temporary nationalisation of the banking system. Writing in The Irish Times today, they say the consequences of the State overpaying for bad loans by 10 to 30 per cent are “truly appalling”, while nationalisation “requires no such controversial asset pricing process”.