Ireland Must Give $6.8 Billion Immediately to Biggest Banks, Analysts Say

Irish Finance Minister Brian Lenihan needs to inject at least 5 billion euros ($6.8 billion) more cash into the country’s two biggest lenders immediately as part of Ireland’s international rescue, analysts said.

Lenihan should also break up the lenders in preparation for a sale and force further losses on subordinated bondholders of Allied Irish Banks Plc, the nation’s second-biggest lender by market value, Bank of Ireland Plc, the largest, and Irish Life & Permanent Plc, the analysts said.

“We need to sort the bank issue out once and for all,” Oliver Gilvarry, head of research at Dolmen Securities in Dublin, said in a telephone interview. “The banks need to be capitalized with equity up front.”

Ireland agreed yesterday to seek aid from the European Union and International Monetary Fund. Lenihan declined to say how big the bailout will be -- only estimating it will be less than 100 billion euros. Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said yesterday the government needs 65 billion euros to fund itself for the next three years and a further 30 billion euros for the lenders.

Bank of Ireland, in which the government has a 36 percent stake, fell as much as 23 percent in Dublin trading, and was down 9.2 cents, or 19 percent, to 38.9 cents by 2:45 p.m. Allied Irish, which the government is preparing to take majority control of by the year-end, slid 12 percent to 38.3 cents. Irish Life & Permanent dropped 24 percent to 87 cents.

Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said yesterday the government needs 65 billion euros to fund itself for the next three years. Source Goldman Sachs via Bloomberg Close

Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said yesterday the... Read More

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Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said yesterday the government needs 65 billion euros to fund itself for the next three years. Source Goldman Sachs via Bloomberg

Stress Tests

Irish banks forced the government to seek a bailout after bad loan losses surged following the collapse of the country’s decade-long real estate boom in 2008. That year, Lenihan pledged to back most liabilities, including all deposits in Irish banks, a promise that led the government to inject 33 billion euros to support the lenders. As loan losses climbed, the government put the cost of the rescue at 50 billion euros in September this year, fueling investor doubts that Ireland could afford the bailout.

Central Bank Governor Patrick Honohan said on Nov. 10 that investors were still concerned about problems “hiding” within the banks. He also said that losses for Irish and overseas lenders operating in Ireland may total as much as 85 billion euros, more than half the country’s annual economic output.

Stress Tests

The government will start stress-testing the country’s lenders again in preparation for the bailout. All the country’s banks passed the EU regulators’ tests in July, designed to show how banks would withstand a recession and writedowns on some of their sovereign debt holdings.

Photographer: Paul Thomas/Bloomberg

Allied Irish, which the government is preparing to take majority control of by the year-end, slid 12 percent to 38.3 cents. Close

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Photographer: Paul Thomas/Bloomberg

Allied Irish, which the government is preparing to take majority control of by the year-end, slid 12 percent to 38.3 cents.

“A detailed structural plan for the resolution of all Irish banking difficulties will be devised as part of the program,” Lenihan said yesterday. “The first step will be to do a detailed stress-testing on the institutions concerned and to ensure that their capital positions are robust enough.”

Lenders need additional capital to boost their equity Tier 1 ratios, a measure of financial strength, to at least 10 percent, Dolmen’s Gilvarry said. The government could then use “some form of contingency fund to provide a further backstop.”

Ireland’s head of financial regulation, Matthew Elderfield, in March ordered the country’s two biggest banks to raise a combined 10 billion euros by year-end under new targets for lenders to have 7 percent equity Tier 1 and 8 percent core Tier 1 ratios. Elderfield required Allied Irish to raise an additional 3 billion euros in September as loan losses increased.

‘Immediate’ Injections

Allied Irish and Bank of Ireland would each need at least 2.5 billion euros to raise their equity Tier 1 ratios to more than 10 percent, Ciaran Callaghan, an analyst with NCB Stockbrokers, wrote in a note to clients on Nov. 18.

“Immediate capital injections could be made to make faster progress to full compliance with international” capital standards, Elderfield said in a speech in Dublin today. He said a “standby contingent capital facility could be considered to provide a backstop to the banks” as markets remain concerned about further losses beyond what has been assessed by the central bank this year.

Honohan told a parliamentary committee meeting in Dublin on Nov. 10 that while one solution may be to “over-capitalize” Irish banks, “this is not something which the state can be lightly asked to do, given the pressures on its finances.”

Lenihan said first on Nov. 18 that discussions on banks focused on setting up of a “contingency fund” available to recapitalize them.

Firepower

“It will be a powerful demonstration of firepower behind the banks,” Lenihan said in an interview with Dublin-based broadcaster RTE Radio yesterday. “Some of that amount may be required in terms of capitalizing the banks. That can only be established after detailed stress tests are done.”

His comments prompted speculation that Ireland may use the aid to acquire contingent convertible bonds, or so-called co- cos, which convert into equity if banks’ capital ratios fall below a certain level, Eamonn Hughes, head of research at Dublin-based securities firm Goodbody Stockbrokers, said in an interview.

The plan may not provide enough certainty for the banks, as “investors may automatically start betting that some of the co- co bonds would need to be converted in time,” Hughes said.

Lenihan also said the government will force banks to shrink their operations and sell assets. Bank of Ireland has a joint venture with the Post Office in the U.K., while Allied Irish halted the sale of its U.K. division this month.

Asset Disposals

“One clear option is to look at the asset base of the banks themselves to see what overseas and non-essential assets can be disposed of,” Lenihan said yesterday. This relates to “assets other than those needed to fund businesses in Ireland and fund consumer activity in Ireland.”

The National Asset Management Agency, a so-called bad bank set up by the government last year to take over lenders’ risky commercial real-estate loans, may acquire “further defective loans,” Lenihan said in an interview with Dublin-based broadcaster Newstalk radio today.

The government could force a 10 billion-euro loss on holders of the subordinated bonds of publicly traded banks by making them exchange their securities for equity in the banks, NCB’s Callaghan said. That would boost the banks’ equity Tier 1 ratios to more than 12 percent, Callaghan said.

Bondholders

“The pricing of these instruments over recent weeks is already beginning to reflect some type of restructuring,” he said. A swap would “swiftly” address “the capital issue while at the same time helping avoid outright state control.”

Allied Irish and Bank of Ireland have generated a combined 3.37 billion euros of gains over the past 21 months from buying back and exchanging debt at prices lower than their valuation on the banks’ balance sheets, company filings show.

Bank of Ireland’s 1 billion euros of 10 percent notes due 2020 fell 3.25 cents on the euro to a record 63 cents, according to BNP Paribas SA prices on Bloomberg. The Dublin-based company’s 248 million euros of floating-rate notes due 2017 declined 1 cent to 53 cents, BNP Paribas prices show.

Junior debt of Allied Irish, in which the government holds more than 90 percent, also fell. The lender’s 368 million pounds ($592 million) of 12.5 percent subordinated bonds due 2019 dropped 3 cents to 40 cents.

To contact the reporters on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net;

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.

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