Factbox: Irish bank stress test, recapitalizations

DUBLIN (Reuters) – Ireland said its banks need another 24 billion euros of capital to plug potential losses and unveiled a further shake-up of the sector.

The following are details of the results of “stress tests” conducted on Bank of Ireland, Allied Irish Banks, EBS building society and Irish Life and Permanent; their capital needs; requirements to shrink their loan book; and the restructuring of the industry (sources: Irish Central Bank, finance minister, banks):

CAPITAL REQUIRED:

The four banks need to raise 24 billion euros to remain above a minimum core Tier 1 capital ratio of 6 percent under an adverse economic scenario.

AIB would need 13.3 billion euros.

Bank of Ireland needs 5.2 billion euros.

EBS needs 1.5 billion euros.

ILP needs 4 billion euros.

The Central Bank estimated additional loan losses for the four banks would total 27.7 billion euros from 2011 to 2013.

It has also added a capital “buffer” of 5.3 billion euros across the banks, which would cover any large losses after 2013 from the loan portfolio.

SHRINKING BALANCE SHEETS:

The four banks must shrink their loans books, which stood at 255.6 billion euros at the end of 2010, giving them a loan-to-deposit ratio of 180 percent.

The banks must sell 72.6 billion euros of loans by 2013, to reduce the aggregate loan to deposit ratio to 122.5 percent.

AIB must reduce its loan book by 19.4 billion euros.

Bank of Ireland needs to cut by 32.6 billion euros.

EBS must reduce its loan book by 4.9 billion euros.

ILP has to shrink its portfolio by 15.7 billion euros.

Banks should be able to avoid a fire-sale of assets, but the deleveraging is still likely to result in 13.2 billion euros of losses, the Central Bank estimated.

INDUSTRY RESTRUCTURING:

The capital injections will create a banking system that has two universal full-service banks as core pillars and a restructured Irish Life & Permanent, Finance Minister Michael Noonan said.

Bank of Ireland will be the first pillar bank. Allied Irish Banks will be merged with the EBS Building Society to form the second bank. Each of the banks will reorganize their operations into core and non-core functions.

ILP will sell its life insurance subsidiary Irish Life Assurance, as well as other non-banking assets such as its life and pensions business. Its remaining banking assets will also be divided between core and non-core.

Noonan said overseas banks operating in Ireland will help maintain competition in the market.

Anglo Irish Bank and Irish Nationwide, both fully nationalized, do not need extra capital and were not part of the stress test.

METHODOLOGY OF STRESS TESTS:

The Prudential Capital Assessment Review (PCAR) covered an adverse economic scenario from 2011 to 2013 and included an in-depth look at loan portfolios by BlackRock Solutions.

Under the adverse scenario, Irish GDP shrinks by 1.6 percent this year and grows by 0.3 percent in 2012 and 1.4 percent in 2013. Unemployment rises to 14.9 percent this year and 15.8 percent in 2012. House prices fall a further 17.4 percent in 2011 and by 18.8 percent next year, and commercial property prices fall 22 percent this year and then stabilize.

(Compiled by Steve Slater)

Factbox: Irish bank stress test, recapitalizations