IMPACT ON IRELAND:IRELAND'S THREE banks – Bank of Ireland, AIB, and Irish Life and Permanent – passed the EU stress tests of 90 banks in 21 countries but this isn't going to lead to a rush of investor interest just yet.
AIB and Bank of Ireland passed last year’s EU tests but subsequently required further large bailouts, while Ireland required its own bailout, which demonstrated the weakness of the testing.
These latest tests are largely a non-event for the Irish banks given that the Central Bank’s own stress tests, the Prudential Capital Assessment Review or PCar test, last March went much further.
The EU tests considered possible losses over two years; the Irish tests covered three years – over which time the three banks must shed or deleverage themselves of €72 billion in assets to become self-sufficient again.
The banks had to have a core tier one capital ratio – a measure of cash reserves against risk assets – of 5 per cent after covering stress case losses in the EU test; the Irish tests set a threshold of 6 per cent.
The banks (which include EBS, now a subsidiary of AIB) were ordered to raise €24 billion following the PCar tests to over-capitalise themselves to meet likely and unlikely losses on loans, and to regain confidence in the banks.
This money must be raised by the end of this month. About €5 billion will be raised from losses forced on subordinated bondholders and the vast majority of the remainder from the State.
The EU tests included the capital targets set by the Irish tests.
The European Banking Authority (EBA) found that Bank of Ireland would be left with a capital ratio of 7.1 per cent after assessing the banks under “an adverse but plausible scenario”.
AIB would have a ratio of 10 per cent and Irish Life and Permanent 20 per cent. The Central Bank said Bank of Ireland – regarded as the “least worst” Irish bank – would emerge with a lower ratio as its deleveraging would take place earlier than the other two banks.
Bank of Ireland’s deleveraging is front-loaded while Irish Life and Permanent’s disposals are back-ended within the 2011-2013 timeframe of the EU-IMF programme.
The fact that Irish Life and Permanent has a ratio as high as 20 per cent shows just how far the Irish stress tests have gone to stuff the banks with capital to try to win back the confidence of investors.
But the EU tests don’t include Irish Life and Permanent’s loan losses for 2013 or the expected losses from assets disposals through deleveraging in 2013.
The tests estimated that the company would lose €954 million on the sale of its UK loan book of €7.5 billion and €747 million from the sale of the company’s commercial loan book of €2.3 billion – both in the third quarter of 2013.
The sale of Irish Life and a debt buyback will raise capital of €575 million by mid-2013, while Permanent TSB finance would be run down by the end of that year with risk assets declining by €274 million, according to the test results.
As for exposure to risky sovereign debt, AIB is most vulnerable with €5 billion of Irish bonds, €816 million of Italian bonds, €335 million of Spanish bonds, €243 million of Portuguese bonds and €40 million of Greek bonds.
Bank of Ireland has €5.5 billion of Irish sovereign debt but just €30 million of Italian debt.
Irish Life and Permanent has €1.8 billion of Irish bonds but no other risky EU sovereign debt.
The EBA found that the 90 banks had a potential exposure or “exposure at default” of €52.7 billion to Ireland, of which 61 per cent was held domestically.
The capital ratios of the Irish banks following the latest EU tests show that they sit above the 5 per cent capital level set by the EBA.
The PCar targets mean the Irish banks aren’t even worst in class. Eight banks – five in Spain, two in Greece and one in Austria – failed, falling below 5 per cent.
