Details of the planned transfer of distressed property loans from both the Bank of Ireland and Allied Irish Banks to the National Asset Management Agency, the Dublin government’s newly created ‘bad bank’, caused a slide in shares of the Republic’s main banks.
Bank of Ireland closed down 9 cents at €1.60 while AIB was down 8 cents at €1.56.
Brokers said the falls reflected market nervousness over the likely level of writedowns the banks will have to take when the loans are transferred to Nama.
The size of the writedowns will determine how much the banks will need to raise in fresh funds to bolster their capital positions.
Both banks have already received €3.5bn (£3.2bn) of state support following a preference share investment, under which the government has the right to appoint two members to the board and has 25 per cent of the votes on key decisions. Bank of Ireland told a parliamentary committee last week it did not expect to have to resort to additional state support.
However, the latest announcement makes it clear both banks will need to raise considerable additional cash to maintain minimum capital buffers against future losses.
The government has indicated Nama will pay a discount to book value of about 30 per cent to reflecting falls in average property values of about 50 per cent from the 2007 peak.
The plan, which has to be approved by shareholders at both banks, envisages Bank of Ireland will transfer up to €16bn of assets while AIB will transfer €24.2bn. This reflects the fact that a larger proportion of AIB’s lending was for land and development property, which has been worst hit by the crash.
Applying the 30 per cent discount this means the two banks will together receive not less than €28bn in government-backed bonds from Nama, which they will be able to swap for cash with the European Central Bank, improving their liquidity positions. The reduction in risk-weighted assets, as a result of the loan transfer, will also ease their funding needs.
However, the transfer will result in a loss on disposal of €3.4bn for Bank of Ireland and €7.3bn for AIB. Both banks have already partially provided for the loan losses. The actual loss for Bank of Ireland will be €2bn, while for AIB it will be €5bn.
Bank of Ireland calculates its equity tier one ratio, a measure of the bank’s solvency, will fall from 6.65 per cent to 4.2 per cent.
AIB’s core tier one ratio, which includes the €3.5bn of preference shares, will fall from 8.5 per cent to 6.3 per cent.