Speaking at a Committee of the European Parliament yesterday, the ECB President (Mario Draghi) cautioned that the Irish banking sector still remains a source of some concern with some outstanding issues requiring swift and decisive action. The President added that provisioning and RWA adjustments are required following the CBI’s Balance Sheet Assessment (BSA). He went on to say that the CBI’s BSA “falls short” of the more stringent forward-looking stress tests to be conducted as part of the ECB’s Comprehensive Assessment. <p>
These latest comments from the ECB follow similar remarks by the European Commission (EC) last Friday (13 December) in its staff report on the Irish programme, indicating that a “substantial increase in provisions is warranted for some loans” while encouraging the banks to make “every effort” to reflect the BSA findings in the 2013 year-end accounts. While we expect year-end capital levels to be adversely impacted by these revisions, the banks (and State) will be hoping that further Irish macro and property price improvements over coming months will be reflected in the forward looking stress tests, mitigating the need for additional capital (details on the stress parameters and methodology are expected to be published at the end of January). <p>
Separately, the PCAR banks published historical capital and exposure detail yesterday as part of the EBA’s transparency exercise 2013. Under the EBA definition of capital, BoI’s CT1 declined to 12.4% at June 2013 (compared to reported CT1 of 14.2% at the half-year). The variance relates to €7.9bn of additional RWAs for the group under the EBA methodology which reflects a higher transitional floor (100% versus 80% that the Central Bank of Ireland allows BoI to use in its regulatory capital). From speaking to management we understand that this issue is not connected to any potential BSA related RWA adjustment and doesn’t impact the current capital buffer with reference to BoI’s €1.0bn CoCo instruments (trigger level of 8.25% still calculated on basis of lower RWAs based on 80% transitional floor). AIB’s CT1 of 15.1% under the EBA analysis was as reported at the half-year stage.
<p><h5>Ciaran Callaghan</h5>
Disclaimer: www.merrion-capital.com/disclaimer
Merrion Stockbrokers Limited (registration no. 307878)
is a limited liability company whose registered office is at
Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4, Ireland.