Bank share prices ‘to remain volatile’

DESPITE the recent assurances from Brian Lenihan about staying on as finance minister, bank share prices are destined to remain volatile for some time, warned Goodbody Stockbrokers banking analyst Eamonn Hughes.

While the minister’s reassurance about his illness was encouraging, Hughes said his subsequent remarks on RTÉ had a key bearing on how the funding issues and loan transfers to NAMA will be handled, he said.

The minister’s comment that the NAMA transfers would accelerate losses at the lenders and the Government would provide further capital that could lead to the State increasing its stake in the banks has added to uncertainty, he said.

Mr Lenihan’s statement that those issues would be decided “in the first quarter of this year” has raised the stakes even higher, he said.

“We had been of the view that a reasonable tranche of NAMA loans may have to be transferred across – let’s say one-third to c40% – to give the market and the EU a reasonable steer on the final NAMA haircut outcome,” he said.

It was thought also that any capital raising exercise would require the EU to deliver a preliminary assessment on the business viability plans of the banks before those key decisions facing the banks were agreed.

If the minister’s timeline holds, that “probably brings the process forward a month or two” making it more difficult for analysts to get clarity on the losses and the capital needs facing the banks in the intervening period, he said.

Hughes reckons AIB needs to raise €4.1 billion of equity and to sell its stake in M&T in the US to move to an 8% core equity ratio. Bank of Ireland will require a further €3.3bn, he said.

The volatility in capital levels and in fair values resulting from even modest tweaks to Hughes’ own NAMA haircut assumptions means the share prices of both banks “are likely to remain highly volatile until we get full clarity on the final NAMA haircut and any EU state aid ruling”, he said.