AIB and BoI move to reassure investors over stress tests

Irish banks will move to calm stock market nerves on Monday after faring among the worst financial institutions in European stress tests.

Results of EU-wide stress tests by the European Banking Authority (EBA) posed a question mark over both AIB's and Bank of Ireland's ability to absorb losses in the event of a prolonged economic downturn.

Both institutions will issue formal statements to the stock markets this morning to reassure investors that their capital position is strong and that the tests do not actually reflect their financial performance.

Their statements are unlikely to differ from those issued at the weekend detailing their immediate reaction to the results.

The EBA found that in an "adverse scenario" AIB's capital ratio, which measures a bank's equity against possible risks, such as borrowers failing to repay loans, fell below the level generally required by regulators and markets. The authority found AIB would have a Common Equity Tier 1 (CET1) ratio of 4.3 per cent at the end of 2018, below the 5.5 per cent typically required.

Worst performers

In the same circumstance, the EBA found that Bank of Ireland’s ratio would be 6.1 per cent. AIB was one of the worst performers of 51 lenders in

Europe

. The result prompted speculation the Government would be forced to delay the lender’s planned privatisation, which it took over in 2009 following the previous year’s financial crash.

However, the bank responded by saying that it was well capitalised and its actual CET1 ratio was 13.3 per cent at the end of June. It argued that the results were projections based on assumptions and should not be seen as an indication of the bank’s future performance.

AIB reported a €1 billion profit for the first six months of the year and last Thursday repaid €1.8 billion to the Government.

Bank of Ireland said the test assumed a severe economic downturn. The lender said its capital position was strong and its ratio was 10.7 per cent at the end of June. It made €560 million profit in the first six months of the year.