ALLIED IRISH Banks (AIB) and Bank of Ireland will need €4.1 billion and €2.2 billion respectively to bolster their capital reserves by the end of the year and early next year, stockbroking firm Davy has estimated in a report.

Davy is forecasting cumulative loan losses of €14 billion at AIB and €10 billion at Bank of Ireland – equal to 12 per cent and 8 per cent respectively of loans, higher than other European banks.

In a report on the scenarios facing the two banks, analysts Emer Lang and Stephen Lyons maintain their most recent estimates for the discounts on the banks’ Nama loans at 27 per cent for Bank of Ireland and 35 per cent for AIB.

The analysts estimate Bank of Ireland can raise the €2.2 billion in capital required to reach an equity ratio of 6 per cent by raising about €1 billion from restructuring its debts and a further €1.2 billion by tapping investors in a rights issue.

AIB can reach the same equity ratio by raising €3.1 billion through a rights issue, restructuring debts bringing a €200 million gain and by selling the bank’s 23 per cent stake in US bank MT for €830 million at current prices.

Davy expects the Government to take a direct stake of 14.8 per cent in Bank of Ireland and 8 per cent in AIB as the banks will pay down only some of the State’s preference shares after the rights issues. The State’s stakes would rise to 72 per cent at Bank of Ireland and 75 per cent at AIB if they failed to raise private cash.

Ms Lang said Bank of Ireland has “a fighting chance” to raise up to €1.3 billion from a rights issue underwritten by the Government in the second quarter of this year.

Uncertainties surrounding the loan discounts and transfers to the Nama and the European Commission’s response to the banks’ restructuring plans needed to be resolved before investors could be approached for capital, she said.

“Investors are on the sidelines. There are lots of uncertainties but hopefully they will be resolved in the not too distant future.”

Most analysts believe banks will have to reach a 8 per cent equity ratio – a closely watched measure of a bank’s ability to absorb losses.

For every percentage increase in the ratio, AIB and Bank of Ireland would each require an extra €1 billion, said Ms Lang, but that the 8 per cent ratio will only need be reached over time as it would otherwise affect the flow of credit.

Davy says Bank of Ireland’s stock could be worth 48 per cent more, while AIB’s shares could be 63 per cent higher if they can raise outside capital.