Financial Services

AIB and Bank of Ireland set to fare better in bank stress tests

Cantillon: EBA likely to be impressed by lowering of non-performing loans since 2016

Bank stress tests: authorities are assessing for a 19.8 per cent fall in Irish house prices under a worst-case scenario, compared to 22.3 per cent priced in two years ago.

Sat Feb 3 2018 - 11:45

AIB and Bank of Ireland, which were among the worst performers in European stress tests in 2016, are on track to fare better this year as they continue to lower their levels of troubled loans, according to analysts.

This time round, authorities are assessing for a 19.8 per cent fall in Irish house prices under a worst-case scenario, compared to 22.3 per cent priced in under the stress tests two years ago. And they are looking at a 21.8 per cent slump in Irish commercial real-estate valuations, compared to 28.4 per cent in 2016.

While the European Banking Authority, overseeing the tests, are factoring in a marginally sharper contraction in Irish gross domestic product (GDP) under an adverse scenario this time round (at 11 per cent, compared to 10 per cent previously), and a deeper drop in UK GDP and property prices, analysts see the two Irish banks gaining brownie points for the pace at which they have managed to lower their non-performing loans in the past two years.

‘Fret less’

"On balance, we think investors will fret less this time in Ireland, bearing in mind AIB and Bank of Ireland were two of the four worst performers in the 2016 tests," said Goodbody Stockbrokers analysts Eamonn Hughes in a note to clients this week.

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Davy analysts Diarmaid Sheridan and Stephen Lyons said that the assumptions "inform our view regarding dividends in the Irish banking sector, particularly at AIB". AIB returned to paying dividends last year for the first time since 2008, while Bank of Ireland is on course in the coming months to make its first shareholder payout since the onset of the financial crisis.

Still, analysts don’t see AIB getting the go-ahead from regulators to start distributing surplus capital – estimated at €3 billion – until 2020, based on 2019 results.

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