THE STATE’S two largest banks, AIB and Bank of Ireland, need a combined €7.2 billion in extra capital to bring their reserves up to the levels demanded in the long term by investors, according to stockbrokers Merrion Capital.

AIB would require a further €4.4 billion, while Bank of Ireland will need an extra €2.8 billion to bring their equity capital ratios up to 8 per cent of assets, said Merrion analyst Sebastian Orsi.

The stockbroking firm also increased the expected discounts to be applied to the loans being transferred to the National Asset Management Agency (Nama) “to reflect concerns on valuations”.

Mr Orsi raised his forecast on the discount facing AIB’s Nama loans of €24 billion from 25 per cent to 35 per cent and Bank of Ireland’s Nama loans of €15.5 billion from 18 per cent to 27 per cent.

Merrion left its forecast for cumulative loan losses at AIB over the three years to the end of 2010 unchanged at €12 billion.

Mr Orsi said that, while AIB had “obvious asset disposal options” to raise €2.5 billion of capital, he saw “less upside for shareholders” at AIB than in Bank of Ireland.

He said that the banks were unlikely to be able to generate enough capital internally to meet the higher capital requirements expected internationally by investors and to repay the Government’s €7 billion injection by 2013.

Mr Orsi said the banks would have to “bite the bullet” and seek private capital “sooner or later”.