Pillar banks ‘well-placed’ for ECB assessments

Bank of Ireland and AIB are well-placed to pass the ECB’s comprehensive assessment of the banking system this year, according to Merrion Capital analyst Ciaran Callaghan.

Bank of Ireland shares struggled for a second day following the release of a letter by ECB president Mario Draghi highlighting ongoing concerns about the banking system here, including the high levels of non-performing loans.

Mr Draghi noted that the asset-quality review and stress tests, which make up the comprehensive assessment, would be “different in nature” to the Central Bank’s balance-sheet assessment completed before Christmas.

Mr Callaghan said: “While the ECB’s comprehensive assessment is likely to present new challenges, we still think that the pillar banks — AIB and Bank of Ireland — are in a strong position to emerge unscathed...

“In addition, there has already been significant scrutiny of the institutions’ balance sheets and loan documentation in recent years, following the 2011 Prudential Capital assessment review, and monitoring by the authorities over the official Irish programme. This should leave the banks better prepared than compared to some of their European peers.”

However, there still appeared to be uncertainty over the viability and restructuring of Permanent TSB, Mr Callaghan said.

The 99.2%-state-owned bank is still awaiting approval from the European Commission for the restructuring plan submitted last summer.

It plans to split the bank into three parts: A good bank; an asset management unit to wind down the bad assets; and a separate UK division.

However, its biggest challenge will be the ECB stress tests. A good chunk of its tracker mortgage book and non-performing loans are earmarked for the asset management unit.

However, the success of this plan hinges on securing funding for these assets. The most suitable body to open a credit line is the ECB, but it is implacably opposed to such a move.

It is believed the commission wants the Government to provide a funding line for Permanent TSB. Politically, this would be a very difficult move for the Government.

The stress tests take a forward-looking view of the sustainability of banks. If Permanent TSB does not have its restructuring plan in place then that could create difficulties.

Permanent TSB releases its results and an operating update today.