AIB and Bank of Ireland should seek to raise new capital before Nama is in place, according to a new report from Merrion Capital.
According to estimates, the banks need over €9 billion of new equity between them and analysts at Merrion believe that with economic recovery likely to be slow, AIB and BoI should seek to raise capital sooner rather than later.
The analysts say that credit losses are expected to remain high for both banks and that they should avail of the market appetite for bank equity recapitalisations "at the earliest possible opportunity.
"Based on our forecasts, we expect AIB and BoI to have end 2010/2011 equity tier I ratios of 3.3 per cent and 3.5 per cent, respectively, after the impact of transferring assets to Nama. This assumes a 25 per cent discount on AIB's Nama transfers and 18 per cent for BoI," the analysts say.
"To rebuild capital to 6 per cent equity tier I levels at end 2010/F2011, on our forecasts, we estimate AIB requires €2.9 billion of new common equity and BoI requires €2.4 billion. To get to 8 per cent by the end of 2010 would require an incremental €2billion each – the required timing to reach 8 per cent is debatable, but earnings retentions through 2012 appear unlikely to fully satisfy the banks’ needs," they add.
Merrion analysts said they believe both banks should also move to refinance their expensive €1.5bn trances of Government preference shares before the end of the year, suggesting that hybrid capital could present a near term solution for the refinancing.
"Clearly, the Irish banks need to be well capitalised, and current international market standards are moving to an 8 per cent core tier 1 capital ratio, predominately comprised of common equity, well above the forecasted levels post Nama," the analysts say.
"At current share prices, there is a significant cost to the shareholders of AIB and BoI if the €1.5 billion of tranches of Government preferred shares and the attached warrants are not redeemed before year end. These can be cancelled if the banks refinance the prefs with core tier 1 capital," they add.
"If AIB or BoI was to raise €1.5billion of core tier I capital before the end of 2009 and repay their respective €1.5billon tranche of 8 per cent perpetual preference share injected by the Government, it would allow for the cancellation of 10 per cent warrants held by the Government," they conclude.
