Davy's raises discount estimates for banks

AIB may face a 25 per cent discount on loans it sells to the National Asset Management Agency (Nama), according to a revised estimate from stock broking firm Davy.

In a note to investors this morning, Davy increased its estimate of the likely discount to be applied to loans transferred from AIB and Bank of Ireland.

The AIB discount is an increase of 5 per cent from an earlier estimate while it expects a “haircut” of 20 per cent on loans transferred from Bank of Ireland, up from 16 per cent.

Yesterday the Government published the draft Nama Bill which contained a number of new elements, including a provision for risk-sharing through the use of subordinated bonds.

According to Davy, the “proposal that banks will share a portion of the risk suggests some incremental pain for the banks in addition to our original 'haircut' estimates”.

The firm said another “crucial and yet unknown metric” was the level of core capital the regulator will require banks to have once they have transferred loans to Nama.

Davy is making an assumption of 5 per cent on this, but said each 1 per cent sought will require the raising of an additional €1 billion for AIB and €880 million for Bank of Ireland.

“The Government is clearly set against nationalisation, hence preserving value for equity-holders. How much depends on the above and how any shortfall is met.”

Analyst Sebastian Orsi at Merrion Capital said this morning the risk-sharing features add complexity to the scheme but said the “transfer discount remains the key variable”.

He is forecasting a 23 per cent discount for AIB and 18 per cent for Bank of Ireland.

Mr Orsi said a 5 per cent increase discount would be “up to €1.75 billion for AIB and €1 billion for Bank of Ireland,” subject to the mix of loans transferred.

Although the banks will be technically solvent after the transfer of assets to Nama they will need to raise equity to meet international standards.

Merrion estimates there is a €2.4 billion equity capital deficit for AIB and €2.2 billion for Bank of Ireland. Each 1 per cent on the target capital ratio represents around €1 billion.

He said if the banks were unable to source private capital the “State is not opposed to taking a majority stake in the banks”.

At 9.05am AIB was trading at €2.56, a gain of over 9 per cent while Bank of Ireland was up 3 per cent at €2.53.