Funding pressures on State ‘may be less severe than thought’

FUNDING pressures on the State caused by the banking crisis may not be as severe as first thought, because the Government no longer has to carry the full burden of recapitalising the country’s banks.

A new analysis by Davy projects the cost of the banks’ re-capitalisation at potentially €19 billion.

Net of “self-help” measures by the banks, including debt buy backs, the Government may need to contribute €14.6bn of that figure, €11bn of which it has already been acquired.

If AIB and Bank of Ireland can raise equity from their shareholders or through disposals the ultimate figure will be driven even lower than that, the analysis says.

The latest review of the banks and the state of the national debt by Davy Research says 85% of the €25bn debt required for this year has already been raised which compares favourably with a 60% euro average.

In the case of NAMA, which could be passed into law by the end of this month, it will contain billions in written-down assets that can be offset against the Government’s funding of the banks, according to the 16-page assessment.

From the banks’ perspective the transfer of €80bn of loans across to NAMA at a 20% discount in value provides a significant risk-weighted asset (RWA) benefit for the banks, which also reduces the initial re-cap burden on the State”.

That “saving” is however, offset by an unrealised loss sitting in NAMA of at least €4bn. That loss has to do with the banks possibly underestimating the level of their bad debt exposure for which the state becomes liable once NAMA is up and running.

Whether that €4bn loss will have to be borne by further state monies will depend significantly on “how aggressively NAMA works out its positions, market conditions and the timing/magnitude of any future levy on the banks”, Davy said.

Due to uncertainty in trying to fully value the assets in question, Davy suggests the amount of bad debts not accounted for in the transfer of assets to NAMA could be as much €4bn or more, which would push the current total figure of €19bn of fresh capital funding to over €23bn by the time the crisis has worked itself out.

Having stressed those potential risks Davy said its analysis “points to a maximum of €14.6bn coming from the Irish State initially”.

Some of this is likely to be recovered as the banks improve their own funding in a variety of ways.

Bank of Ireland is well placed to raise €1.5bn in a rights issue in the fourth quarter of the year, allowing it to pay back a similar amount of the government’s preference shares.

The report suggests AIB may also carry out a similar cash raising exercise, while it could generate significantly more than the market thinks from disposing of its Polish operation.

If that happens it would also help ease the burden on the state with regard to the funding of the banks.

In an earlier report the broker said the state of the Irish banks reflects closely the experience of Finland, where up to 30% of jobs and a similar level of branch closures were forced on the sector.

In Sweden the government re-cap costs were worked out at just 4% of GDP according to the IMF, because two of their larger banks were eventually able to raise capital themselves.

Davy’s €14.6bn funding figure, excluding cash raising by the banks, would be nearer 9% of Ireland’s GDP at peak, which is similar to that of the Finnish experience, the report said.