Ireland’s ‘Worst Fears Surpassed’ on Banks’ Capital (Update1)

By Dara Doyle and Colm Heatley

March 30 (Bloomberg) -- Ireland’s banks may need at least 31.8 billion euros ($42.7 billion) in new capital after a real- estate slump left them crippled by mounting bad loans.

The fund-raising requirement was announced after the National Asset Management Agency, the country’s so-called bad bank, said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders, and the financial regulator set new capital targets. The discount compares with the government’s initial 30 percent estimate.

“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin today. “The detailed information that has emerged from the banks in the course of the process is truly shocking.”

The government’s aim is that the asset agency will free banks of toxic property loans and revive lending. First announced by Lenihan a year ago, the agency will eventually buy loans with a book value of 80 billion euros.

Allied Irish Banks Plc needs to raise 7.4 billion euros, while Bank of Ireland Plc will need 2.66 billion euros. Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros, Lenihan said.

Asset Sales

Lenders must have a core Tier 1 capital ratio, a key measure of financial strength, of 8 percent, and an equity core Tier 1 capital of 7 percent, according to the regulator. They must “set out plans to ensure that capital is in place by the end of 2010,” it said.

The regulator has given Ireland’s banks 30 days to submit recapitalization plans. Dublin-based Allied Irish said in a statement that it will sell its stakes in banks in the U.S. and Poland and that this will meet a “substantial part” of its capital needs. It also plans a share sale.

Lenihan said in the parliament that if Allied Irish can’t raise enough capital privately, the state will step in and that it’s “probable” the government will have a majority stake in what was once Ireland’s largest company by market value.

“Allied Irish have a lot more to do, but at least they have time to do it,” said Kevin McConnell, head of research at Bloxham Stockbrokers in Dublin. “The fear was that they wouldn’t be given time and the government would move immediately.”

Cross-town rival Bank of Ireland also expects to raise a “substantial” part of its new capital privately, Lenihan said. He said the bank has a “strong future.”

Allied Irish American depositary receipts fell 5.9 percent to $3.37 as of 2:06 p.m. in New York. Bank of Ireland jumped 13 percent to $7.46 euros.

“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.”

To contact the reporter on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net; Colm Heatley in Belfast at cheatley@bloomberg.net