AIB fared relatively better than its main rival Bank of Ireland in so-called stress tests conducted on large European banks by regulators, but the outlook for their shares will likely remain clouded for some time.
Irish banks had decried the results of similar stress tests last run two years ago when they were rated as the most exposed in Europe. They said at the time that they were unfairly penalised under the methodology used by the European regulators.
Under the latest stress tests, both Irish banks performed much better than two years ago, while British lenders Barclays and Lloyds, along with Italy’s UBI, performed relatively poorly in the tests of 48 EU banks.
The European Banking Authority (EBA) said AIB would have a capital ratio of 11.83% at the end of 2020 under a scenario of a severe downturn.
Under the same stress conditions, Bank of Ireland’s ratio would fall to 8.93%, the EBA calculated.
Elisabeth Rudman, managing director at rating firm DBRS, said: “Two years on from the 2016 stress test, we believe the Irish banks’ 2018 results show the reinforced financial and capital position of the banks.”
Owen Callan, financials analyst at Investec Ireland, said the share prices of Irish banks next week will continue to look more to how well the Italian banks fared under the stress tests than their own performances.
The tests are designed to simulate the stresses loan and balance sheets of key European banks would face under various outcomes, including a recession.
Irish bank shares, along with most other European lenders, have been under selling pressure since the summer when the concerns about the new Italian government and its clash with the EU over its budget plans first loomed, said Mr Callan.
Ahead of the results of the stress tests, which were released after the close of trading, AIB shares had fallen sharply, by almost 3%, to €4.03. That means the shares have lost almost 19% in the past year. At €6.24, Bank of Ireland shares were down 1.25%, to bring their losses in the past year to almost 8%.