S&P: Banks lack adequate capital

The Irish banks probably have enough capital not to fail the ECB stress tests, but they do not have sufficient levels to start functioning normally, according to Standard & Poor’s Nigel Greenwood.

The credit ratings agency upgraded the sovereign credit rating to A- from BBB+ with a positive outlook last Friday, but retained a negative outlook on five Irish banks — Bank of Ireland, AIB, Ulster Bank, KBC Ireland and Permanent TSB — during the week.

Irish banks face ECB stress tests later this year as part of the Comprehensive Assessment of the banking system. Mr Greenwood, a director of financial institutions ratings at S&P, who was speaking at a briefing in Dublin yesterday, said that these banks will probably have enough capital to get through the stress tests, but they are well shy of the capital needed to return to robust levels of lending.

S&P estimates that AIB’s risk adjusted capital relative to the size of its assets is 2.4% and Bank of Ireland’s is about 3.7% which is short of the 7% that is considered adequate. Only when the banking system is able to generate profits on a sustainable basis will it be able to generate capital.

And even though S&P is bearish on the state of the banking system, it is becoming increasingly optimistic about the sovereign rating.

However, it could take many years for Ireland to regain its ‘triple A’ status, said Kyran Curry, director, sovereign ratings with S&P. He said the national debt would have to be reduced quite significantly from current elevated levels.

But there is a one-in-three chance that the sovereign rating will be upgraded in the medium term if the fiscal consolidation path is maintained.

Despite gains by Sinn Féin and hard-left independents in the local and European elections — all of whom made promises to scrap water charges and property taxes — Mr Curry believes that if these parties do attain power they will continue with broadly similar policies in place now.