Central bank review deflates Bank of Ireland’s capital cushion

Bank of Ireland’s capital adequacy ratios suffered a sharp drop today after the Irish central bank said it needed to make extra provisions for loan losses as part of an industry-wide review.

Bank of Ireland said it was not required to raise additional capital after the health check, carried out ahead of Ireland’s exit from an EU/IMF bailout scheme, but noted that it was still in talks with the central bank about the results of the review.

“The outcome of this engagement cannot be anticipated with certainty and actions taken following engagement with the Central Bank of Ireland may adversely impact capital ratios,” Bank of Ireland said in a statement.

A spokeswoman said Bank of Ireland was happy with its current approach to potential loan losses and reiterated that it did not need to raise additional capital.

Under the balance sheet review, Bank of Ireland’s core Tier 1 capital adequacy ratio as of June 30 fell to 10.61 percent of risk-adjusted assets from 14.2 percent and measured 9.85 percent when tough new capital rules, set to be introduced next year, were applied.

Bank of Ireland said it expected to maintain a core Tier 1 capital ratio above 10 percent.

The slide reflected the central bank’s estimate that Bank of Ireland needed to set aside an extra 360 million euros to cover potential loan losses on Irish mortgages, an additional 486 million euros to cover potential losses on business loans and 547 million on defaulted loans.

The central bank also increased Bank of Ireland’s risk-weighted assets.

Shares in the bank were 2.5 percent lower at 0.27 euros at 0840 GMT.

Local analysts said the central bank’s review was based on data as of June 30 of this year and since then there had been improvements in the bank’s main markets of Ireland and Britain and in its loan book performance.

“The exercise appears to crudely apply industry-wide experience to Bank of Ireland’s loan book performance with scant detail revealed,” Emer Lang, an analyst at Davy Stockbrokers, said in a statement.

“We note the outcomes are not set in stone, remaining subject to ongoing engagement between Bank of Ireland and the central bank.”

No one at the central bank was immediately available to comment.

In a brief statement, state-owned Allied Irish Banks said it would consider the findings of the review in the preparation of its full-year results and that based on an initial assessment it believed it remained well capitalised and in excess of minimum regulatory requirements. Source: Reuters