BANK OF Ireland will be required to bolster its reserves by €5.2 billion as a result of the Prudential Capital Assessment Reviews carried out.
This could result in the bank falling into majority State ownership although it still hopes to avoid this scenario. At present, the State owns 36 per cent of Bank of Ireland.
The bank is set to become the biggest financial institution in the State as a result of the restructuring announced yesterday by the government.
The new funds will involve €4.2 billion in incremental equity capital, including a regulatory buffer of €500 million. In addition, €1 billion in contingent capital is also required.
This will come from a debt instrument – effectively a bond – that could, under certain circumstances, convert into equity capital.
The capital review involves a deleveraging plan that anticipates a loan-to-deposit ratio of less than 122.5 per cent for Bank of Ireland by December 31st, 2013.
This would result in a reduction in its non-core loan portfolios of about €30 billion between December 2010 and the end of 2013. Like AIB, Bank of Ireland will be split into core and non-core businesses.
While these entities will have separate management teams, they will continue to operate under the Bank of Ireland umbrella.
The core business will become a “significantly more domestically focused bank”, Minister for Finance Michael Noonan said yesterday. It will comprise its existing businesses in the Republic, its branch network in Northern Ireland, its Post Office deposit joint venture in the UK and limited capital markets businesses.
It will not include New Ireland Assurance, which is still slated for sale.
The non-core business will be wound down or sold over time.
These will include portfolios of UK intermediary-sourced mortgages and selected international niche businesses such as project finance, asset-based lending and certain previously identified international corporate banking portfolios.
It will also include certain international commercial investment property portfolios and land and development loans of less than €20 million to be potentially transferred to Nama.
These portfolios are estimated at about €39 billion of customer loans and around €22 billion of credit risk weighted assets at December 31st, 2010.
Bank of Ireland said it would be engaging with its advisers to draw up initiatives aimed at raising the €4.2 billion in equity capital that it requires.
This could include raising funds from new and existing investors and could involve a debt-for-equity swap.
Any shortfall in funding will be met by the State.
The case for investment is that the bank will be well capitalised and have a large market share when the Irish economy returns to growth.
But many analysts are sceptical that Bank of Ireland can stave off majority State ownership.
Mr Noonan said yesterday that the bank would be given time to raise the additional capital from private sources although no deadline was announced.
“We expect to be in a position to make an announcement on our capital plans in the coming weeks,” the bank said yesterday.
Speculation that chief executive Richie Boucher might step aside proved to be unfounded.
A bank spokesman said Mr Boucher would lead the company’s capital-raising initiatives.
Trading in Bank of Ireland shares was due to recommence at 8am this morning having been suspended yesterday pending the outcome of the stress tests. The bank will release its full-year results on April 14th.
