Irish banks needed to raise €24bn when last probed by the nation’s central bank three years ago. Now, only the smallest surviving bailed-out lender, Permanent TSB Group Holdings, faces a capital shortfall after a European assessment this month, Finance Minister Michael Noonan signalled on October 14.
“Permanent TSB is the most vulnerable of the Irish banks”, said Emmet Gaffney, an analyst at Investec Plc in Dublin. “Even in an extremely bearish scenario, I can’t see a capital need of more than €700m.”
Investor concerns that failing banks would sink Ireland pushed the country into a bailout in 2010. Four years on, Irish borrowing costs based on 10-year bonds are closer to Sweden than Spain, and Mr Noonan said last week that the two largest banks “are very secure in capital terms”.
“We would not expect any capital requirement to be a huge issue from the sovereign’s perspective”, said Ross Abercromby, an analyst at credit ratings firm DBRS Inc in London.
“The outcome of the stress tests is important for the banks but also for the sovereign as well.”
The European Central Bank will publish the results of stress tests on 130 of the eurozone’s banks on October 26. Ray Gordon, a spokesman for Permanent TSB, declined to comment. He repeated that Deutsche Bank is advising the lender on “capital markets in general and on developing relationships with the international investment community”.
The yield on Irish 10-year bonds stood at 1.74%. That compares with a peak of 14.2% in July 2011, three months after the central bank said lenders needed more capital. In all, the Government injected about €64bn to save the financial system.
The central bank last year assessed the banks before Ireland left its rescue program in December. That left them “in a fairly good place to weather” the ECB tests, according to Denzil De Bie, an analyst with Fitch Ratings Ltd. in London.
“We don’t think there’ll be fundamental shocks — not for Bank of Ireland or AIB,” said Mr De Bie.
The weak link, though, remains Permanent TSB. The company was part of Irish Life & Permanent Plc, which Mr Noonan split up after needing a €4bn state rescue during the crisis.
Permanent TSB’s common equity Tier 1 capital ratio, a key measure of financial strength, fell to 12.7% at the end of June from 13.4% in December, as it continued to grapple with losses stemming from the nation’s real-estate bust.
Banks must show they hold a ratio of at least 8% of risk-weighted assets in the ECB’s base-case scenario. The ratio must be 5.5% under the ECB’s worst-case scenario. The Government can switch its €400m of contingent convertible notes in the bank into equity, reducing the capital needed, said Mr Gaffney. A share sale is one potential avenue to close the remaining gap.