Bank of Ireland chief Richie Boucher: needs to raise €4.7bn, according to JP Morgan

In a sign that financial institutions may be getting back on their feet just a year after facing utter collapse, a parade of European banks have been approaching the equity markets with rights issues to raise some of the billions in capital that regulators and analysts say they need to satisfy new market norms.

Banks in Germany, France, Italy, Sweden, Norway and, most recently, the troubled British banks Lloyds and RBS, have announced new capital issues in the last couple of weeks as institutions take advantage of higher share prices and the new appetite for bank equity.

But so far Irish banks have shown no sign of satisfying that appetite with rights issues of their own, leading some analysts to worry that they might miss a fleeting chance to shore up their balance sheets and reduce reliance on state capital support.

"There is a danger that Irish banks could be left behind," said Oliver Gilvarry, Dolmen Stockbrokers' head of research. "The rights issues have been very successful so far, but if you have one that doesn't go well, the window will close for a time."

The growing momentum for bank recapitalisation has drawn several of Europe's leading banks to the markets in recent weeks. France's big banks, BNP Paribas and Société Générale, announced plans to raise €4.3bn and €4.8bn respectively, to evade the clutches of state aid. Italy's biggest bank, Unicredito, wants to add €4bn to its capital base. These new issues, which would be quite substantial relative to market capitalisation, will put core tier 1 equity levels in excess of 8%, or twice the standard regulatory minimum. Other European banks, such as Norway's DnB Nor Bank and the Swedish banks, are aiming for similar levels.

Investment bank JP Morgan said in a report last week that 8% is becoming the new effective minimum for bank equity levels, reflecting a punishing couple of years for the sector when impaired assets ate into reserves and forced governments to ride to the rescue by providing guarantees and capital injections. From now on, for banks to remain independent, their core equity will have to be stronger.

But the two big Irish banks, AIB and Bank of Ireland, will be nowhere near that level after they transfer billions in distressed property loans into Nama. Although Nama will relieve the banks of the burden of impaired assets, lowering the overall risk-weighting of the loan books, it will also force the banks to recognise losses, or haircuts, which will take huge chunks out of their capital.

According to finance minister Brian Lenihan, the overall Nama haircut will be 30%. Both AIB and Bank of Ireland have said their levels will be lower than this, with Bank of Ireland saying privately that its haircut could come in below 20%. Analysts estimate that post-Nama core equity will be in the 5%-6% range for both, before impairment charges on other parts of the loan book, such as mortgages or dry commercial investment.

That kind of capital isn't low, but it will rank the Irish institutions far below their European peers if the rights issue bonanza continues.

JP Morgan put AIB and Bank of Ireland among the four European banks most exposed to the need for fresh capital, estimating AIB would need €6.8bn while Bank of Ireland would have to raise €4.7bn.

Lenihan made clear his preference for the banks to raise capital independently before leaning on the state for more money. The government has already put €7bn into the two banks, not to mention the €4bn that Anglo Irish Bank has sucked up. Anglo already is enjoying a capital derogation from the Financial Regulator, but government and analyst estimates put its ongoing capital need at €3.5bn minimum.

But the private levers available to the Irish banks at the moment could be just out of reach, despite the success other banks are having in the markets.

Analyst consensus says AIB is unlikely to attempt a rights issue soon, at least not before it has completed its available asset disposals. AIB is widely expected to sell its share in New York's M&T Bank, one of the US's top regional banks, sometime before the middle of next year, which could add 0.9% to its equity. More controversially, it could sell its controlling stake in the highly profitable Bank Zachodni in Poland. Ironically, Soc Gen has been rumoured as a potential buyer, indicating that capital-raising among European banks could herald a wave of consolidation across the continent as healthier banks swallow up the weak ones.

Bank of Ireland may try a rights issue by year end, however. Given its recent success in the debt markets in raising unguaranteed funding, insiders are contemplating going to market with a rights issue in time to redeem some of the government's 25% preference shareholding in the bank. Such a move would recapitalise the bank while also reducing its repayment burden for state assistance, helping the bottom line.

"The window for fundraising appears well and truly open for funds by the top tier banks," said Bloxham's Kevin McConnell. "How the secondary regional banks now move will be of greater relevance to the Irish banks, particularly in the size and discount offered to investors as part of the funding process."

Austria's Erste bank is one to watch in this regard. Reports last week said the bank is seeking €1bn in new capital, or 11% of its market value – a somewhat conservative issue compared to the big French banks, for instance.

But the big hurdle to clear for Bank of Ireland and AIB is Nama. Without finality on the legislation, the Irish banks have no serious market proposition to bring to shareholders. Given that the legislation has not even passed committee stage, the timeframe is narrowing. Even a speedy passage of the bill will give the banks only about six weeks before Christmas to get a proposal to shareholders.

Paying off the government preference shares may have to take second place to a more orderly capital issue next year, but by then the broader desire for capital may have already been satisfied, leaving the government to take up the slack again.