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Stressed Banks Still Haunted

Stressed Banks Still HauntedStressed Banks Still Haunted

It’s almost a decade since the worst banking crash in western Europe, but the mistakes of loans past still haunt the Irish financial system.

The results of European Banking Authority stress tests revealed in late July showed Bank of Ireland Plc and Allied Irish Banks Plc among the worst performers. S&P Global Ratings said last week about a fifth of Irish loans are still not being fully repaid and banks now have to contend with the economic fallout from the UK’s decision to exit the European Union, Bloomberg reported.

“While Irish banks have made substantial progress, they remain vulnerable,” Dhruv Roy, an analyst at S&P in London, said in a report after the stress test results came out.

All this comes as the government prepares to start selling AIB, seeking to recover the €21 billion ($23.4 billion) of taxpayers’ money used to save the lender during Ireland’s meltdown starting in 2010. As a gauge of the concern among investors, the yield on AIB’s November 2025 subordinated bonds surged 70 basis points to more than 6% for the first time in almost a month.

While the Irish government ensured banks survived, the bailout didn’t address the quality and sheer quantity of the loans. Ireland’s household debt-to-disposable income ratio was 168% at the end of 2015, according to S&P. That compares with 127% in the UK and 64% in Italy.

The tests had no pass/fail mark and didn’t specify capital shortfalls, but the conclusions provide pointers to where weaknesses lie. In the “adverse scenario” produced by the EBA, AIB’s capital buffer fell to 4.3%. Only Italy’s Banca Monte dei Paschi di Siena SpA, which plans to offload €28 billion in doubtful loans, was worse.

AIB said the tests weren’t indicators of its future performance, while Bank of Ireland said its capital position was “strong.” In addition, analysts suggested the examination didn’t account for unique factors within the Irish banks.

Financialtribune.com