Bank of Ireland says it has no need to raise capital for KBC deal

Bank of Ireland will not have to raise additional capital to carry out the purchase of KBC Bank Ireland's performing loans, amounting to €8.9 billion of mainly mortgages, according to a spokesman for the bank.

“We envisage funding the transaction from internal resources,” the spokesman told The Irish Times in response to questions.

Bank of Ireland is also seen as the most likely acquirer of stockbroking firm Davy, which was put on the market last month in the wake of a bond-trade scandal. However, industry sources say that this, too, will not require the bank to raise further capital.

KBC Bank Ireland said on Friday that it has entered into a memorandum of understanding (MoU) with Bank of Ireland, "expressing the parties' intention to explore a route that could potentially lead to a transaction whereby Bank of Ireland commits to acquire substantially all of KBC Bank Ireland's performing loan assets and liabilities."

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The move by KBC to quit the Republic would reduce the market to just three retail banks, and comes eight weeks after Ulster Bank said it was winding down. Bank of Ireland led a share price surge among the three banks as a carve-up of the two overseas-owned banks among the three remaining lenders will shrink competition in the market. It will also provide room for them to grow at a time when loan demand remains muted. Permanent TSB and AIB are in talks to acquire much of Ulster Bank's €20 billion loan book.

Goodbody Stockbrokers analyst Eamonn Hughes estimates that Bank of Ireland would need to hold €350 million of capital in reserve against the KBC portfolio, which equates to 0.7-0.75 percentage points of common equity Tier 1 (CET1) capital for the State's largest bank by assets.

Mr Hughes estimates that Bank of Ireland will have a CET1 ratio of 13.5 per cent at the end of this year, some 0.5 points above its own target. Between this and “likely capital management options through loans sales, life company capital management, securitisation options, it looks to us that BoI can resort to internal resources only with this transaction”, he said.

A deal with KBC would boost Bank of Ireland’s mortgage market share from 26 per cent to about 36-37 per cent and drive earnings higher, he said. It would see it jump over AIB to become the largest mortgage lender in the State.

Still, other market sources said on Friday that the KBC and Davy deals would leave Bank of Ireland with limited excess capital above its own official medium-term targets.

It would be difficult for Bank of Ireland to ask shareholders to back a share sale to support its capital levels in the current environment, with the stock trading at a little over half of book value, or the bank’s estimated value of its assets, as investors continue to fret about the earnings outlook for banking stocks.

Shares in Bank of Ireland closed 8.4 per higher at €4.37, while AIB added 5.7 per cent to €2.33 and Permanent TSB advanced 4.6 per cent to €1.13.