Bank of Ireland will have to raise provisions by €1.4bn; AIB says it's "well capitalised"
By Finfacts Team
Dec 2, 2013 - 9:03 AM

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Bank of Ireland was founded in 1783 and the premises at College Green, Dublin, of the Irish Parliament, which became defunct on the Act of Union coming in to effect in 1801, were purchased for £40,000 in 1803.

Bank of Ireland said today that it will not be required to generate additional capital following the Central Bank of Ireland’s balance sheet assessment while AIB said it remains "well capitalised."

The Central Bank (CBI) had been required by the bailout troika to do an balance sheet assessment (BSA) of the banks as of June 30th 2013. This assessment included: (i) an asset quality review (AQR) of risk classifications and provisions against the CBI's impairment guidelines and (ii) a review of risk weighted assets (RWA) to arrive at pro-forma point in time capital ratios.

The CBI expects that the outputs of its exercise will be used in next year’s EU-wide comprehensive assessment. Under the assessment, Bank of Ireland requires no further capital and expects to maintain a buffer above a Tier 1 common equity ratio (CET1) of 10% on a Basel 3 transitional basis.

The Central Bank estimated that Bank of Ireland would need to set aside an extra €360m cover potential loan losses on Irish mortgages, an additional €486m to cover potential losses on business loans and €547m on defaulted loans.

The Bank also raised Bank of Ireland’s risk-weighted assets, usually loans adjusted for the likelihood of non-payment, by €6.8bn.

Permanent tsb, Ireland’s third domestic bank said that its capital position remained above the minimum regulatory requirements based on the outcome of the review.

The Central Bank itself should have released the results rather than leave each individual bank to try and slant the assessments.

Bank of Ireland: Adequate capital but Central Bank review highlights upside risk to provisions: Eamonn Hughes of Goodbody comments  -- "Bank of Ireland has released a statement this morning with the findings from the balance sheet assessment of the Central Bank. The bank is not required to generate any additional capital following the assessment (it expects to maintain a buffer of capital above the CET 10% level on a Basel III transition basis), but there is upside risk to the level of provisions that the bank requires and also to risk weighted assets. There is also no update on the position in relation to the preference shares.

Working through the pro-forma balance sheet assessment, the Central Bank’s opinion for the purposes of the review is that the potential adjustment to ROI’s mortgage impairments is c.€360m. The potential observation re specific impairment provisions for CRE, SME and Corporate loans is €486m. Also, the potential updated treatment re Expected Loss on defaulted assets is €547m, although the bank notes it has already substantially incorporated this update in methodology to its Basel III projections including its pro-forma fully implemented CET1 ratio of 8.6% at June 2013. Elsewhere, the potential observations on RWAs on defaulted assets are €3.1bn, with a further €3.7bn on performing RWAs. To put this in context, RWAs were €51bn in June 2013.

The Central Bank has not instructed BOI to make any adjustments to its provisions and RWAs, but there is obviously now an upside risk to both. Whilst provisions in H2 will close the gap a bit, the provisioning figures could negatively impact our equity forecasts (every €300m is c.1c from TNAV, which we estimate at 25.5c in 2016, our valuation date). We will revert with details on our revised numbers in due course, but expect the stock to be weak this morning.

Banks: AIB indicates it is well capitalised after initial findings from CBI balance sheet assessment; Eamonn Hughes and Colm Foley add - - "Press reports over the weekend (and leading up to it) had indicated that the banks were likely to be digesting the findings from the Central Bank’s Balance Sheet Assessment over the weekend. AIB has this morning indicated that it has been advised of the findings of the review which it will consider in the preparation of its year end provisions and financial statements. The Balance Sheet Assessment includes an evaluation of asset quality, risk weighted assets (RWAs) and capital as of June 30 2013.

Based on the initial assessment of the findings, AIB believes it continues to be well capitalised and in excess of minimum regulatory requirements. Beyond that, there is very little detail so it is difficult to gauge the order of magnitude of any impact on provisions or RWAs."

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