State investment in republic’s banks ‘inevitable’

THE Government will have to invest billions in the republic’s banks to offset huge losses on property backed loans, according to banking experts.

And it is regarded as inevitable that mergers will be forced on financial institutions, with permanentTSB owner Irish Life and Permanent the most likely to be involved.

In separate pieces on Irish banks NCB and Merrion Stockbrokers forecast further possible Government intervention, mergers and a cut in dividends.

NCB, in their analysis, Irish Banks in State Protection: What Next?, state there is “only one investor in town” when it comes to Irish banks.

“It seems inevitable that the Irish Government will have to provide any new equity that the banks do need. This may take the form of underwriting rights issues or taking direct stakes in the institutions. The solution proposed by the UK Government for its banks has some similarities, in that in addition to providing preference capital, they appear willing to underwrite equity offerings.

“We believe that this will inevitably lead to the Irish Government taking meaningful stakes in their banks. We believe that such investments may coincide with some consolidation activity. It also seems certain that the Irish Government is trying to decide whether to recapitalise the banks at a very early stage, providing a cushion for rising bad debt charges, or raising capital as and when needed. We would favour the former.”

NCB said it seems certain that the Government will use the powers in its legislation to orchestrate consolidation among the six banks.

Separately, Merrion’s Sebastian Orsi said: “Government support may be required to underwrite capital increases”.

Mr Orsi noted that: “At a high level, we do not envision a merger of AIB and BoI as palatable for Government given major cost synergies imply redundancies in an already weak economy. An acquisition of Anglo by AIB or BoI would increase their commercial property exposure, while not addressing capital or liquidity.

“Amongst the larger players, a merger of Anglo and IL&P would create a third large domestic banking franchise, diluting Anglo’s concentrated commercial property exposure, without resulting in major redundancies. However, it would not address capital or liquidity issues.”

Meanwhile, the Government will today send a draft of its bank guarantee scheme to the EU Commission for consideration.

The Government were hoping to publish final details of the scheme this week but it needs EU approval before it can do so.

The commission will examine whether the scheme meets EU state aid rules.

Government sources said they will be unable to publish the scheme until the commission reports back to the Department of Finance with its sanction.