End of government guarantee poses a funding challenge for banks

BANKS will face a critical challenge to raise funds once the blanket government guarantee expires.

That will happen at the end of September and will make funding “the most important challenge facing Irish banks”, said Fitch Ratings. However, the agency said the outlook will have improved by then as losses from loan transfers to NAMA will be fully dealt with.

When the guarantee ends, banks will still be dependent on the European Central Bank and state guarantees, leaving the sector open to negative sentiment.

Funding is still tight, while uncertainty also exists about how the banks will refinance “when the blanket guarantee scheme ends,” said Fitch’s Matthew Taylor.

Funding should not be too problematic however, as it will be helped by the extension of a less comprehensive guarantee scheme until the end of 2010, as well as continuing access to ECB funding, he said.

Fitch points out that both AIB and Bank of Ireland passed the recent stress tests coordinated by CEBS.

Evidence also exists that suggests investor confidence has picked up in the meantime. And if that shift in perception is sustained it should make funding easier post the blanket guarantee, Fitch said.

It warned banks are likely to continue to need a state guarantee “to attract funding” and expects the European Commission to approve the renewal in December 2010 of the Eligible Liabilities Guarantee scheme. Continuing reliance by the banks on state guarantees will continue to pose questions for investors who “have concerns over the dependability of the Irish guarantees”.