BoI success in capital raising round but challenges remain

WITH the successful 95% take-up of its rights issue, Bank of Ireland may have successfully wrapped up its €3.56 billion capital raising round; but challenges still lie ahead – particularly with the international funding environment remaining tough, with term-debt markets still closed for most European banks.

This, according to Ciarán Callaghan of NCB Stockbrokers, along with the risk of the losses on some of its non-NAMA-bound loans remaining high, are “the two biggest headwinds left facing Bank of Ireland”.

“The regulator’s comprehensive stress-testing of the banks’ balance sheets should ensure the sector is adequately capitalised by the year-end to cope with the latter. However, the former may prove to be more difficult to overcome in light of the structural loan-to-deposit imbalance facing the Irish banks,” he said.

“While Bank of Ireland hopes to disengage from Government assistance over the coming months, via unguaranteed issuance, term debt markets currently remain closed for the majority of European banks. Against this backdrop, it is becoming apparent that further political intervention is urgently needed if confidence is to be restored in the financial sector,” Mr Callaghan said. However, this could be aided via the EU’s €440bn loan guarantee financial stability plan for struggling countries.

“In any event, when markets do reopen, spreads are likely to remain wide with the banking sector feeling the impact of risk depricing. This all means intense competition for deposits is likely to persist for the foreseeable future, partially mitigating the liquidity benefit that the NAMA bonds were expected to bring,” Mr Callaghan went on to say.

Regarding the successful outcome from the Bank of Ireland’s rights issue – the last element of its capital raising round – Bloxham Stockbrokers summed up: “A 94% take-up can be seen as a very strong level of support for the bank’s fundraising efforts, against an extremely difficult financial markets backdrop.”