Irish Banks Need $43 Billion on ‘Appalling’ Lending

By Dara Doyle and Colm Heatley

March 31 (Bloomberg) -- Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse.

The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system. The central bank set new capital buffers for Allied Irish Banks Plc and Bank of Ireland Plc and gave them 30 days to say how they will raise the funds.

“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”

The agency aims to cleanse banks of toxic loans, the legacy of plunging real-estate prices and the country’s deepest ever recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy.

“The information that has emerged from the banks in the course of the NAMA process is truly shocking,” Lenihan said.

‘Lot of Work’

Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros. Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively.

“The regulator is taking the bank system by the scruff of the neck,” said James Forbes, senior equity strategist at Irish Life Investment Managers in Dublin. “Allied Irish has a lot of work to do to avoid majority state ownership, Bank of Ireland less so.”

Allied Irish will sell its stakes in banks in the U.S. and Poland and said this will meet a “substantial part” of its capital needs. It also plans a share sale.

Lenihan told the parliament that Bank of Ireland also expects to raise a “substantial” part of its new capital privately. The bank declined to comment ahead of its full-year results, due at 7:00 a.m. today.

The government announcement was issued after the Irish stock market closed. Late yesterday in New York, Allied Irish’s American depositary receipts were down 8 percent to $3.29. Bank of Ireland jumped as much as 21 percent.

Capital Target

Lenders must have an 8 percent core Tier 1 capital ratio, a key measure of financial strength, by the end of the year, according to the regulator. The equity core Tier 1 capital must increase to 7 percent.

AIB had an equity core tier 1 of 5 percent at the end of 2009. Bank of Ireland had a 6.6 percent ratio on Sept. 30. Those ratios exclude a government investment of 3.5 billion euros in each bank, made at the start of 2009.

“The banks are undergoing major surgery via NAMA,” financial regulator Matthew Elderfield said at a press conference in Dublin. “Even after surgery, they will suffer losses in coming years. They need a transfusion now to speed their recovery and that of the economy.”

If Allied Irish can’t raise enough funds privately, the state will step in with aid, Lenihan said. It is “probable” the government will then end up with a majority stake in what was once Ireland’s largest company by market value, he said.

The banks “are in a better position today, but we also have to be cautious about thinking we are done and dusted here,” Forbes said.

‘Awful Losses’

Ireland may not be able to afford to pump more money into the banks. The budget deficit widened to 11.7 percent of gross domestic product last year, almost four times the European Union limit, and the government spent the past year trying to convince investors the state is in control of its finances.

The premium investors charge to hold Irish 10-year debt over the German equivalent was at 139 basis points yesterday compared with 284 basis points in March 2009, a 16-year high.

Ireland’s debt agency said it doesn’t envisage additional borrowing this year related to the bank recapitalization. It is sticking to its 2010 bond issuance forecast of about 20 billion euros, head of funding Oliver Whelan said in an interview.

“The bank losses, awful as they are, represent a one-off hit. It’s water under the bridge,” said Ciaran O’Hagan, a Paris-based fixed-income strategist at Societe Generale SA. “What’s of more concern for investors in government bonds is the budget deficit. Slashing the chronic overspending and raising taxation by the Irish state is vital.”