The CEO of ptsb (Jeremy Masding) confirmed to the Irish Times that the bank is to take additional provisions following the Central Bank of Ireland’s (CBI) Balance Sheet Assessment (BSA). Mr. Masding went on to say that the BSA was a rigorous process, with the incremental impairment charges reflecting “prudence on prudence”, but “absolutely within the bounds of reasonableness of what one would expect from your regulator”. In a brief statement on 2 December the group advised that its capital position remains “above minimum regulatory requirements” following the BSA. <p>
Excluding BSA related provision top-ups we estimate that ptsb will recognise total impairment charges of €3.9bn over the three years to 2013, above its PCAR stress scenario of €3.4bn. While the group’s capital position currently remains robust (June 2013: CT1 15.7%) solvency levels are likely to come under pressure at the time of the forward-looking European stress test in our view given the bank’s weak internal earnings capacity. ptsb is not expected to return to profitability until 2017 (at the earliest) due to its low net interest margin (H1 2013: 82bps versus BoI of + 190bps in Q3 2013) as revenue generation is constrained by exposure to tracker mortgages (c. 70% of total loans). <p>
However we note that ptsb’s capital position is not facing the same levels of future deductions as peers under the new CRD IV rules in the coming years as the group has already closed its defined benefit pension scheme (eradicating the deficit) while not recognising deferred tax assets (DTAs) in recent periods (total unrecognised DTAs of €423m at June 2013). This effectively means that the group is less susceptible to any harsher or accelerated phase-in of capital deductions imposed by the ECB at the time of next year’s European stress tests. While BSA triggered recalibration of banks’ provision and RWA models present a headwind to capital levels, we see the accelerated implementation of DTA deductions as the most formidable challenge facing the Irish banks. The Minister for Finance has repeatedly raised this issue in recent weeks indicating that there is still no clarity in relation to the constitution of CT1 capital to be used in the European stress tests, highlighting the eligibility of DTAs dependent on future profitability as a possible risk. <p>
At present each regulator may use national discretion to plan the timing of capital deductions to be applied to its banks under new CRD IV rules (from 1 Jan 2014 to 2024). As per the latest consultation paper on this topic (released in September 2013), the CBI currently intends to commence the DTA phased capital deduction for the Irish banks (AIB – €3.9bn, BoI – €1.7bn) in 2015 at the rate of 10% per annum. However we see a risk that the ECB may adopt a more stringent approach at the time of the European stress tests. While a full upfront DTA capital deduction seems unlikely to us, it is possible that the ECB pushes for 20% annual writedown commencing in 2014 (in line with anticipated pension and other deductions). Assuming that the stress test is to be of a three year time horizon (Yves Mersch, Euro Finance Week conference, 18 November 2013) we estimate that AIB and BoI’s Core Tier one capital would be reduced by €1.6bn (CT1 – 2.4%) and €0.7bn (CT1 – 1.3%) respectively as a result of an accelerated phase-in. With the Spanish banks regulatory capital now set to benefit from a legislative change to transform select DTAs to tax credits, the Irish authorities are likely to have lost a powerful ally that would have helped them lobby for a more lenient treatment on DTA stress assumptions. We may receive further clarity in this issue in late-January when the ECB shares further details on the stress testing methodology.
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