IRELAND - The National Pension Reserve Fund (NPRF) may have to invest further capital into Allied Irish Bank (AIB) in the form of ordinary equity shares, the minister of finance has confirmed.

In a statement on the current situation of the banking industry, Brian Lenihan confirmed the first tranche of impaired loans - originally valued at around €16bn and equivalent to 20% of the anticipated total of transfer assets - is in the process of being transferred from five banks and building societies to the new National Asset Management Association (NAMA).

These assets were purchased by NAMA at an average 47% discount to the original price, with Lenihan claiming valuations were conducted in a "hard-headed commercial manner" to protect taxpayers' interests.

The two banks partially owned by the State through the NPRF's €7bn recapitalisation programme last year, AIB and Bank of Ireland, will initially transfer €3.29bn and €1.93bn respectively.

Lenihan also said the new capital requirements, set by the financial regulator in conjunction with the new Central Bank, will require financial institutions to hold an 8% core tier 1 capital requirement of which 7% must be equity, and that must be in place by the end of the year.

Yet following the initial transfer of assets to NAMA, it is estimated BoI will need to raise an additional €2.7bn to meet the new capital requirements. It plans to do this through private capital, however Lenihan added: "To support it, the State will commit to converting part of its preference shares in BoI into ordinary equity". It is expected the State will remain a minority shareholder in the Bank following the planned restructuring.

In contrast, AIB is likely to require further funding from the government via the NPRF, as it will need an additional €7.4bn of equity capital to meet the new rules. The bank will also have to submit a detailed capital plan to the regulator by the end of April because of the large amount required, although "basic elements" will include the sale of assets in the US, Poland and UK.

Lenihan admitted, however, that the proceeds from these sales "will not be sufficient to address the full requirement". He therefore confirmed the State would "convert some or all of its preference shares as required on terms to be agreed" to fill any gap.

The preference shares held by NPRF in AIB and BoI currently provide a fixed dividend of 8% when declared by the bank. But in February BoI agreed to pay the NPRF €250m in ordinary equity shares in lieu of a dividend, as the European Commission had requested coupon payments be suspended until it had considered the restructuring plans. (See earlier IPE article: Irish roundup: Bank of Ireland, AIB)

Lenihan argued if the capital raising and private participation was successful, there may be no need for new Exchequer funding, but said the money would be provided in the form of ordinary equity to be held by the NPRF if needed.

The government also intends to provide €8.3bn of funding to Anglo Irish Bank, with the possibility of a further €10bn to cover future losses, as the "least worst option"", according to Lenihan, to avoid the general instability of winding the bank down.

However, once Anglo Irish is no longer a listed entity the investment will be held directly by the Minister of Finance and managed by the National Treasury Management Association (NTMA). In contrast, the NPRF Commission "will be given the ongoing role of managing the State's financial investment in AIB and BoI".

Preliminary figures from the BoI for 2009 revealed the deficit in its defined benefit (DB) pension scheme increased from €1.48bn in March 2009 to €1.63bn by the end of the year. It blamed the rise on "increased longevity of pensioners, lower interest rates, high wage inflation historically and subdued investment returns".

The bank noted in the results: "There is recognition between the Bank and all relevant parties that this situation is not sustainable and that we must agree a shared solution to address the issue. We are making good progress in this matter."

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