Banks will need €9bn in extra capital

THE country’s two main banks will require a massive €9 billion in extra capital on top of the €3bn pumped into them by the state earlier this year to prevent them from going under.

According to a new analysis, the main banks will need a combined €9bn to bring their capital reserves in line with the more exacting international standards being demanded of financial institutions by their regulatory bodies.

Merrion Stockbrokers, authors of the new analysis, said the total amount need not be raised in one go.

It stressed an amount of €9bn will be required over time to ensure the two meet the tougher regulatory environment being put in place by governments internationally in the wake of the global credit crunch.

Merrion said because global lending has freed up somewhat, AIB and Bank of Ireland should move “at the earliest possible opportunity and try to raise €2bn each.

Like the Central Bank earlier this week, the brokers are pessimistic on the economic outlook for the next 12 to 18 months, forecasting tentative recovery in 2011. The economy, which will shrink by 9% this year, will start to recover around mid 2010, but will also suffer an annual decline of 3% next year as the recession finally bottoms out.

Though sectors such as pharmaceuticals and chemicals are likely to continue to deliver strong export growth those export gains may not result in a huge upsurge in employment.

Other negatives include the continuing increase in unemployment, wage cuts and further tax increases, anticipated in the December budget.

Taking those factors into account the recovery in personal consumption, even from a low base, “will be muted”, the report said.

It added the timing and the level of the peak in unemployment will be crucial, with the Economic Social Research Institute forecasting unemployment will reach 16.1% in 2010 with limited job creation expected beyond that.

Given that weak trading outlook, the two banks have significant capital deficits relative to market expectations “they will need to satisfy to operate independently”, Merrion said.

The market standard for core tier I capital ratios is converging toward 8%, with core capital comprised primarily, if not wholly, of common equity.

Based on forecasts, the report expects AIB and BoI to have equity tier I ratios of 3.3% and 3.5%, respectively, at end 2010/2011 after the transfer of assets to NAMA.

It said also that the €1.5bn of Government preference shares in the main banks are becoming “increasingly expensive” due to the increase in their share prices.

On that basis the money should be paid back by the end of year deadline, it said.