Stress tests ‘mark the best way forward’
However, Professor Honohan and Financial Regulator Matthew Elderfield did express hope that a smaller — “but more soundly constituted” — Irish banking sector “should be in a better position to provide loans and other financial services to households and businesses and to support the economic recovery”.
Prof Honohan — who called Ireland’s financial woes “one of the costliest banking crises in history” — added that a downsized banking sector here shouldn’t hamper consumer choice.
While he said that there could be an initial concern over reduced competitiveness, he opined that the cost and pricing of bank services, for customers, should prove more of an immediate concern than the availability of actual credit funds.
“It is a prerequisite to the banks returning to normal functioning that they should have ample capital to meet even the market’s most gloomy prognostications,” he said.
While the methodology behind this year’s more severe stress tests looked at every mortgage loan in the state and also estimated both loan-life and three-year loan loss scenarios for each of the four relevant institutions, Prof Honohan said he didn’t envisage many home repossessions taking place and he added that the tests were designed to predict a worst-case scenario.
Speaking of the Central Bank’s consumer protection role, he added that the bank would work with the retail banks towards reaching solutions with customers over distressed loans and mortgages.
Meanwhile, Mr Elderfield said that the banks would be watched closely by the authorities to ensure they were treating tracker mortgage customers correctly and offering them fair and viable alternatives if they are looking to switch mortgage products.
THE board of AIB last night welcomed the proposal to merge with Educational Building Society to form a major bank under the Government’s plans to revive the Irish banking sector.
“AIB welcomes this proposal and will update the market in due course as details are finalised and developed further,” it said.
With that in mind the bank, which is 92% owned by the state, said it plans to make presentations to analysts and media on April 12, when it will announce its 2010 preliminary results.
Those presentations will also provide an update on AIB’s strategic review of its business and restructuring plans, it said in a detailed statement in response to the latest round of stress testing showing AIB will need a further injection of €13.3 billion to satisfy international markets it will have enough capital in its coffers to deal with whatever future funding or lending crises that could hit it in the future.
On that question, AIB acknowledged that the substantial new amount of capital to be raised by the bank “is designed to definitively assure all stakeholders, including depositors, other customers, staff and investors, that AIB will continue to be a systemic part of the Irish banking sector”.
“The very strong capital base that results will enable AIB to provide long term support to its customers and play an active role in the recovery of the Irish economy. We are developing initiatives that ensure customers’ needs are facilitated and help businesses and home owners under stress.”
On the issue of stressed home owners, financial regulator Matthew Elderfield called on the banks to acknowledge that many of their customers with loan difficulties needed to be approached by them in the interests of both sides.
He also said it was in the best interests of borrowers who find themselves in difficulties for whatever reason to go and talk to their banks if they are having difficulties in meeting their loan repayments in the current difficult circumstances.
AIB’s provisions include a bad debt charge of €4.5bn in 2010, AIB said.
The figures exclude both provisions and charges related to NAMA loans, which have been separately provided for, it said.
LOAN losses at Bank of Ireland could amount to almost €15bn, in a worst-case scenario, according to the latest stress tests’ most stringent measure.
That figure — arrived at by asset management firm BlackRock Solutions, which aided the Central Bank in its testing — is double the figure initially forecast by the bank itself.
Yesterday’s updated capital and liquidity guidelines for the main Irish banks ultimately ruled that Bank of Ireland — which will form one of the two pillars of the planned new-look Irish banking system — needs an extra €5.2bn in capital in order to withstand further worst-case scenario economic crises.
The bank said that it will be announcing its capital plans in the coming weeks, but remains confident of meeting its funding targets and has “a sustainable future”.
“As with any stress test, the adverse stress scenario is designed to cover ‘what-if’ situations reflecting even more stressed macro-economic conditions than might reasonably be expected to prevail. If the additional potential loan losses in the adverse stress scenario don’t materialise, the group should significantly exceed the 10.5% minimum core tier-1 capital ratio requirement,” the bank said.
While the Government will grant Bank of Ireland time to generate its additional capital from private sources, any amount that cannot be raised will be injected through state aid and will increase the bank’s level of state ownership past its current 36% level.
Interestingly, however, Central Bank governor Patrick Honohan suggested the restated capital requirements for the banks mean that the realistic outcome is that all of the Irish banks will fall into majority state ownership.
Currently Bank of Ireland and Irish Life & Permanent are the only institutions in which the state controls less than 50%.
Ireland’s banking map is set to be dominated by an EBS-bolstered AIB and Bank of Ireland, with Permanent TSB falling into state hands and Ulster Bank heading a depleted foreign-owned level of competition.
A restructured Bank of Ireland — which is set to shed €30bn of assets in the next couple of years — is likely to revert to being a mainly domestic-focused bank; albeit keeping its operations in the North and its joint venture with the Post Office in Britain.
FINANCE Minster Michael Noonan said yesterday that further capital requirement assessments for the two “wind-down” banks — Anglo Irish Bank and Irish Nationwide — will be made public in May.
While neither institution was included in yesterday’s updated capital and liquidity stress tests, carried out by the Central Bank, both were active.
Irish Nationwide announced that it had become the latest lender to raise its standard variable mortgage rate — due to come into effect at the beginning of May — while Anglo confirmed that it generated the largest annual loss in Irish corporate history, last year, to the tune of €17.7bn.
Irish Nationwide said it was upping its mortgage rates due to the high cost of raising funds. Its hike will add an extra €34 to monthly repayments on a €100,000 mortgage over 20 years.
Meanwhile, Anglo chief executive Mike Aynsley said he was confident the nationalised lender would not require any further money from the taxpayer to bail it out. The bank has already received €29.3bn in state funding.
Meanwhile, the Mr Noonan said there is no immediate need for additional capital in either Anglo or Irish Nationwide, adding that it remains Government policy “to work out these institutions in an orderly manner over time, and to minimise further injections of taxpayer capital into either institution”.
He said that should any additional capital be required by either bank, the Government will “consult with the external partners on the timeframe and means of recapitalising those institutions at minimum cost to the taxpayer, having regard to the financial stability impacts in Ireland and abroad”.
He added that Anglo and Irish Nationwide depositors can feel assured that their funds are safe, with those guaranteed by the state continuing to be protected.
EBS welcomed the decision of Finance Minister Michael Noonan about its future.
His statement clarified the society’s “future status through a combination with the AIB Group, subject to the state aid and regulatory approvals required”.
EBS said it understood and accepted “the Government’s need to re-configure the banking system to support the economy and will play its part in rebuilding the sector”.
The link up with AIB gives it a clear direction and EBS “will work with AIB to maximise its value and serve the needs of its customers”, it said.
It assured customers they can continue to conduct all their business as normal with no change to their existing terms, conditions and relationships.
EBS also acknowledged the Central Bank’s assessment it will require recapitalisation amounting to €1.3 billion and a further €200 million in the form of contingent capital that will ensure the group is robustly capitalised.
It also welcomed the Government’s reconfirmation that all deposits remain fully guaranteed by the state.
EBS, until a few days ago, looked certain to be taken over by the Irish-backed Cardinal Group and US billionaire Wilbur Ross, who had pledged to treat struggling home owners with great consideration by writing off some of their loans in a move to ease their repayment difficulties.
The National Treasury Management Agency withdrew EBS from the negotiations earlier in the week saying the deal was not good value for money. Since September it was clear the Government was under severe pressure to bring order back to the banking system and the pressure to find a new operating model may have been a bigger factor in the decision to take EBS off the market.
The stress testing done by BlackRock showed EBS, which has about 10% of the Irish mortgage market, making lifetime losses on its loan book of more than €2.7bn against a €1bn estimate by the society.
The Central Bank’s analysis was in between those extremes and estimated the losses over the next three years to be in the region of €1.5bn.
The discrepancy between the figures was an issue, it is understood, and the worst case scenario again was thought unlikely to materialise in the society’s case.
PERMANENT TSB — the banking arm of Irish Life & Permanent (IL&P) — is set to fall into majority Government ownership, with other divisions sold off as the business strives to meet a capital target of €4 billion, as set out in yesterday’s stress test.
IL&P will look to meet its new capital target — designed to keep it above a 10.5% core tier 1 capital ratio — through a severe asset disposal programme, including the sale of its life and pensions and investment management divisions (Irish Life Assurance and Irish Life Investment Managers) and through undertaking a liability management exercise, in relation to its banking division’s tier 2 debt.
These undertakings are expected to raise about €1.1bn, with the remainder coming from a mixture of group resources and Government aid.
Yesterday’s stress-test results factored in a worst-case scenario three-year loan loss total of more than €6bn for IL&P, the only one of the financial institutions covered by the Government guarantee not to already receive state funding.
IL&P group chief executive Kevin Murphy neatly summed up the news as “extremely disappointing”.
“It had been our strong belief that the group could avoid the outcome which has arisen today.”
We had set out a roadmap which would have allowed us to fix our banking business over time, without compromising the integrity of the group or the position of shareholders,” he said.
Mr Murphy said that in recent days &it had become clear that “given the wider systemic crisis facing Irish banks and the Irish sovereign“, the group would have to accept a solution “designed to reassure international investors that a line has been drawn under the Irish banking crisis”.
“The result,” he added, “will have major implications for our group and our shareholders and we will have to manage a challenging situation now to protect the franchises of our core businesses and position ourselves as strongly as possible to adapt to the new situation.”
Management added: “The group has been advised that, as it is of systemic importance to the Irish economy, the Government will support its further capital requirements as necessary.”
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