Bank of Ireland share price falls 6.5% following stress tests

Bank of Ireland’s share price fell by 6.5 per cent in Dublin on Monday, amid the fallout from the publication of the results of the European Banking Authority’s capital stress tests last Friday night.

The bank closed down at 17.3 cent after some 83 million shares changed hands on what was a public holiday.

Bank of Ireland and AIB were among the worst performers in the EBA’s stress tests under adverse scenarios applied to their capital buffers for the year ended December 2018.

AIB shares rise

Ironically, AIB closed the trading session up 12.9 per cent at €7.34. However, just 1,000 shares traded in the stock, which is listed on the ESM junior market in Dublin.

With the State owning 99.9 per cent of AIB’s equity, its share price is not an accurate guide to the value of the company.

Both AIB and Bank of Ireland have sought to reassure the markets about their capital strength in the wake of the results, which examined the 51 largest institutions across Europe.

Neither bank is required to raise any capital following the stress tests and both have sought to emphasise that they are profitable and generating capital.

It is understood that AIB senior executives contacted a small number of institutional investors yesterday to explain the context behind the EBA’s results and to calm any concerns that might emerge in advance of the State’s planned initial public offering of 25 per cent of its shares in 2017.

Static balance sheet

The bank has been keen to stress that the results were based on a static balance sheet for 2015. Since then, it has generated another €1 billion in profits from its performance in the first half of this year.

It also redeemed the capital contingent notes, otherwise known as CoCos, that were held by the State, paying €1.76 billion to the Government last week. The bank argues that it would not have been allowed to make this payment if its regulators were concerned about its capital ratios.

Redeeming the CoCos has also removed an expensive form of capital, with an annual coupon of 10 per cent, from its books.

Philip O’Sullivan, an economics and financial research analyst with Investec, said the EBA tests put the Irish banks at a disadvantage to their peers.

“The use of static end-2015 balance sheets provided no credit for the continuing progress the Irish banks are making in terms of working through their troubled loans and generating organic capital,” he said.

Tracker mortgages

He added: “It also penalises them for their stock of low-yielding [mortgage] trackers and Nama bonds along with the costly CoCos, that matured in the past week, all of which are assumed to be replaced by similar (yield and duration) assets and liabilities.

“Nor does it include an allowance for the likely management actions that would arise were the macroeconomic environment to deteriorate.”

The Stoxx 600 banking index fell 1.8 per cent yesterday as investors digested the implications of the EBA test results.

Austrian bank Raiffeisen, which was among the worst performers in the tests, fell 5 per cent, while UniCredit slumped 9.4 per cent as the tests highlighted the need for Italy’s biggest bank by assets to strengthen its capital.

“The stress test results confirm the necessity for UniCredit to reinforce its capital position,“ Banca Akros analyst Luigi Tramontana said in a note. Analysts have said UniCredit needed to raise as much as €9 billion.

Shares in State-controlled Permanent TSB, which was not part of the EBA exercise, rose by 0.8 per cent in Dublin yesterday to €2.15. – (Additional reporting by Reuters)