Irish Stress Tests May Leave State in Control of All Banks

Irish Stress Tests May Leave State in Control of All Banks
The headquarters of Irish Life & Permanent Plc. are seen in Dublin. Photographer: Aidan Crawley/Bloomberg

The Irish government may be forced to take controlling stakes in Bank of Ireland Plc and Irish Life & Permanent Plc, the last of the country’s biggest lenders to escape state control, following tomorrow’s stress tests.

“They’ve clearly got most to lose,” said Oliver Gilvarry, head of research at Dublin-based Dolmen Securities, who has “sell” rating on both banks. “It’s difficult to see how either will end up less than 50 percent owned by taxpayers.”

The Irish Central Bank will publish its third round of stress tests at 4:30 p.m. tomorrow. The results will determine whether the two can avoid joining four of the country’s biggest banks in majority state ownership after they all logged record losses as the country’s decade-long real estate bubble burst.

Ireland may require banks to raise an additional 27.5 billion euros ($39 billion) of capital, according to the median estimate of 10 analysts surveyed by Bloomberg News. The government has pledged to provide that money if banks fail to raise it themselves from a 35 billion-euro fund set up under the country’s international bailout in November. Shares of the two lenders have declined by more than 50 percent since that rescue.

Shares Decline

Irish Life, whose shares fell 45 percent in Dublin trading yesterday to 40 euro cents, has sought a temporary suspension in trading in its stock until April 1, after the results of stress tests are revealed, it said in a statement today. The assessment is “not completed and the quantum of capital that may be required by the group, and the source of that capital, is not yet finalized,” it said.

Bank of Ireland’s shares fell as much as 2.6 euro cents, or 10.5 percent, in Dublin trading to 22.1 cents, marking its lowest level since March 17, 2009. They were down 5.3 percent at 23.4 cents at 1:56 p.m.

Spokesmen at Bank of Ireland, the central bank and Finance Ministry in Dublin declined to comment.

The government has already taken control of Anglo Irish Bank Corp., Allied Irish Banks Plc, EBS Building Society and Irish Nationwide Building Society after injecting 46.3 billion euros into the industry over two years.

Niall O’Connor, a London-based analyst at Credit Suisse Group AG, expects the government to take a stake of about 60 percent in Bank of Ireland, the country’s biggest lender.

Capital Shortfall

“It’s struck me for some time that the bank would find it very difficult avoiding this,” he said. “Still, government control is not necessarily a bad thing as it aligns the interests of government with that of investors in looking to generate a profit.”

Even before the latest stress tests, the regulator ordered Bank of Ireland, already 36 percent state-owned, to raise about 1.4 billion euros, more than its market value of 1.3 billion euros today.

Irish Life, the only government-guaranteed lender to avoid a bailout so far, was ordered to raise 243 million euros in November. That’s now equivalent to twice its market value today.

The Dublin-based company may require more than 1 billion euros to allow its banking unit to operate without support from the company’s life and pension operations, Eamonn Hughes, an analyst with Dublin-based securities firm Goodbody Stockbrokers, said in a note to clients yesterday. The stress tests “may drive this base figure higher again,” he said.

Asset Sales

Both Bank of Ireland and Irish Life, the country’s largest life-assurance and pensions company, will “fight hard” to avoid falling under government control, said James Forbes, director of investment solutions at Dublin-based securities firm Bloxham, which manages about 1 billion euros of assets.

“A pragmatic and likely solution would be for the government to give both companies a certain period of time to sell further assets and raise equity, while pledging to support them if they are not successful in raising money privately,” he said.

Irish Life is weighing the sale of its profitable life-assurance and investment-management units, three people with knowledge of the situation said today. The government is pushing for the sale of the two businesses to limit the amount of money it will need to inject into Irish Life’s unprofitable banking arm, said the people, who declined to be identified because a decision is yet to be made. The units are worth a combined 1.75 billion euros, said Goodbody’s Hughes.

Gerry Hassett, chief executive officer of Irish Life & Permanent’s Irish Life retail unit, said the group would do whatever it can to minimize cost to the state of recapitalizing the bank. If that meant the life assurance part of the company was sold, “so be it,” he said in an interview today with Dublin-based broadcaster RTE Radio, adding that a “range of outcomes” are being discussed.

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