Davy adds €1.1bn to SME loan loss estimate

Loan losses at Bank of Ireland and AIB through exposure to the SME sector could exceed the adverse scenario in the last Central Bank stress tests by up to €1.1bn, according to a new report by Davy Stockbrokers.

However, these losses can be absorbed by savings made through the Central Bank’s prudential liquidity assessment review, according to Davy analyst Emer Lang.

As part of the last round of stress tests conducted in March 2011, AIB and Bank of Ireland were instructed to shrink their loan-to-deposit ratios by disposing assets. There were concerns at the time that both banks would suffer huge capital hits by selling assets in distressed market conditions. But the losses incurred through disposals came well within the levels expected in the review exercise. These savings are sufficient to absorb the €1.1bn in excess SME losses, says Ms Lang.