Ireland’s banks may need further recapitalisation of between €2bn and €4bn, which could result in the need for a second bailout.
A report into the Irish banking sector by Deutsche Bank suggests the above scenarios as being downside risks. However, analysts David Lock and Jason Napier said if the capital requirement were to materialise in the next series of stress tests for the banks, due in 2013, “it could compromise the sovereign’s ability to re-open private funding markets”.
“The volume of additional recapitalisation may be modest and may well have been covered by pre-funding if the sovereign has already returned to the market in the summer of 2012,” the report stated.
“But, with Ireland’s crisis a banking crisis, a hurdle to successful and sustainable return to private funding markets is a clean bill of health for the banks.
“Even though modest, any capital deficit could tip the balance in favour of a second loan programme being required for Ireland to finance its fiscal deficits from 2014.”
With regards to next year’s stress tests, Deutsche’s analysts said if bank losses for this year and next exceed €16bn, further recapitalisations may be needed. The report identified AIB as the bank most at risk of further recapitalisation needs.
However, Deutsche also downgraded Bank of Ireland from ‘hold’ to ‘sell’, due to “delayed normalisation of interest rates and elevated impairment expectations”.
Overall, Deutsche said Ireland is “not out of the woods yet”, with further losses in its banking sector likely.
While the report noted Ireland has complied strongly with the terms of the troika bailout programme, and that only €18bn of the €35bn (of the wider €85bn facility) set aside for bank investment has been required, it said the country’s successful return to the bond markets is not guaranteed and will rely on external and internal factors.
Internally, it noted the need for approving the fiscal treaty, no losses being generated by Nama, and no fresh recapitalisation being needed by the banks.
Externally, it noted the outcome of the Greek crisis and how the EU manages the overall euro debt crisis.
“A positive would be if the EU agreed a restructuring of promissory notes; something which could boost the Irish sovereign liquidity buffer,” it said.
Regarding the Irish mortgage market, Deutsche sees arrears levels continuing to rise and estimates — in the case of a further 15% fall in house prices — industry provisioning requirements of €10.2bn; with AIB needing €2.1bn, and Bank of Ireland, Ulster Bank, and Permanent TSB needing €1.7bn each.
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