Shares in Irish Life and Permanent plunged today amid speculation that the Government may be forced to take a large stake in the lender as a result of the severity of this week’s bank stress tests.
Shares in the bank fell as much as 50 per cent on the Irish market today, and were down 45.2 per cent shortly after 4.40pm, trading at 40.5 cent.
Other financial stocks also suffered, though to a lesser degree. Bank of Ireland shares lost 4.3 per cent to 24.7 cent, while AIB was down 2.6 per cent to 18.5 cent.
A banking source confirmed today that IL&P, until now the only domestic lender to avoid a state bailout, will be hit hard by the stress tests, which are homing in on potential losses in Ireland's residential mortgage market.
The banking source declined to say how large a stake Dublin may take in the lender.
The move would give the Government part or majority ownership of the sixth and last privately owned Irish bank, and may lead to the effective nationalisation of the domestic banking sector.
The intense scrutiny of residential and buy-to-let mortgages in the latest round of Central Bank stress tests is likely to force IL&P, the biggest mortgage lender during the property boom, to cede significant ownership to the State.
IL&P's profitable investment and pensions business and the decision of Permanent TSB to avoid lending to developers meant it has not had to resort to Government cash since the banking crisis began in 2008.
However, IL&P borrowed more heavily than any other Irish lender to fuel mortgage lending.
As a result, IL&P faces the greatest challenge under the Central Bank's new liquidity stress test this week, to bring its €38 billion loan book closer in line with deposits of about €19 billion.
Expected losses arising from the capital stress test and from the planned disposal of excess loans under the liquidity stress test are expected to make some form of Government ownership inevitable.
IL&P's market value of €205 million makes the company's ability to raise cash to cover the losses almost impossible, forcing it to seek Government capital. "It's a question of whether the Government will take over or under 50 per cent [majority control]," said a source familiar with the company's situation.
A spokesman for the company had no comment, while a spokeswoman for the Central Bank would not comment ahead of the stress test results on Thursday.
The final parameters of the stress test exercise remained unresolved late last night as talks continued between the Central Bank of Ireland and the bailout "troika" of the European Central Bank, the EU Commission and the International Monetary Fund.
These discussions are likely to resume this morning as Ministers prepare to review the stress tests at the weekly Cabinet meeting. A further Government meeting is anticipated on Thursday morning, shortly before the test results are made public.
Alongside the stress test exercise, the Government is developing a restructuring plan under which the four institutions concerned will be compelled to reduce their size through the sale of assets.
The primary restructuring plan may be published on Thursday, although many key elements in the process will be subject to further talks between the Government and its bailout sponsors.
Minister for Finance Michael Noonan will present the restructuring plan to his EU counterparts next week in Budapest. However, some talks participants believe Ireland's engagement on the banks with its euro zone partners may continue for some months to come.
The execution of the plan will be crucial, as a European Central Bank programme to provide over €60 billion in medium-term liquidity to the banks will be conditional on restructuring according to a strict timetable.
European sources reiterated pressure on the Government to ensure the tests gave the most definitive assessment of the banks. "This is the one chance they have. If they miss this, if there's something missing, forget it," said a source familiar with preparations for the test.
This reflects considerable frustration among Ireland's euro zone partners about flaws in all previous assessments of the banks which drastically underestimated losses and capital requirements. The attempt to establish a once-and-for-all cost of the banks means the Central Bank is testing for very severe scenarios
The banks being tested – Bank of Ireland, Allied Irish Banks, ILP and EBS – are expected to require between €18 billion and €23 billion out of the EU-IMF bank fund of €35 billion. This will push total State injections into the banks from €46 billion to between €64 billion and €69 billion, excluding Nama.
Fears that lenders would require more than the €35 billion set aside for the banks in the EU-IMF deal have been allayed by an ECB plan to provide them with medium-term funding.
Without the ECB move, the banks would have had to conduct a fire sale of some loan books to cut their reliance on short-term central bank funding, triggering further capital losses.
Analysts at Davy Stockbrokers estimated such a move could require an additional €20 billion in capital.
Additional reporting: Reuters
