European Banking Authority (EBA) Stress Test 2016
The Governor and Company of the Bank of Ireland (the ‘’Group’’)
EBA Stress Test 2016
The Group was subject to the 2016 EU-wide stress test conducted by the European Banking Authority (EBA), in cooperation with the European Central Bank (ECB), the European Commission (EC) and the European Systemic Risk Board (ESRB).
The Group notes the announcement made on 29 July 2016 by the EBA on the 2016 EU-wide stress test and acknowledges the outcomes of this exercise.
The 2016 EU-wide stress test does not contain a pass fail threshold and instead is designed to be used as a crucial piece of information for the supervisory review process in 2016. The results will thus allow competent authorities to assess the Group’s ability to meet applicable minimum and additional own funds requirements under stressed scenarios based on a common methodology and assumptions.
In the stress test two scenarios were run: a baseline scenario and an adverse scenario which assumes a severe economic downturn. The starting point in the stress test is the Common Equity Tier 1 (CET1) ratio for the Group as per 31 December 2015 (13.3% on a transitional basis and 11.3% on a fully loaded basis). In the baseline scenario the Group maintains a CET1 ratio of 16.1% (transitional) and 15.0% (fully loaded) in 2018. In the adverse scenario this ratio decreases to 7.7% (transitional) and 6.1% (fully loaded) in 2018.
The Group’s capital position is strong and the Group continues to organically generate capital, including 70bps on a transitional basis in the 6 months to June 2016. As at 30 June 2016, the Group’s transitional CET 1 ratio was 12.8% and the Group’s fully loaded CET 1 ratio was 10.7%. As previously stated, the Group expects to maintain sufficient capital to meet, at a minimum, applicable regulatory capital requirements plus a management buffer.
Detailed results of the stress test are published on the ECB website and further detailed disclosures in relation to the EU-wide stress tests are published on the EBA’s website. The relevant disclosure templates in relation to Bank of Ireland are also available on the Group’s website at https://investorrelations.bankofireland.com/results-centre/
For further information please contact:
Bank of Ireland
Pat Farrell Head of Group Communications 087-2225656
Damien Garvey, Head of Communications 086-8314435
Mark Leech, Media Relations Manager 087-9053679
The EBA have set out the methodology and key assumptions underlying the stress test and the adverse scenario including:
- The cumulative Irish GDP growth over the three-year time horizon (2016-2018) is assumed to be 10.4% lower in the in the adverse scenario as compared to the baseline scenario;
- The assumption of a static balance sheet. This means that assets and liabilities which mature within the exercise are replaced with similar financial instruments;
- Banks are required to assume no interest income on the increase in defaulted assets in the adverse scenario;
- There is an increasing cost of funding with a constrained pass through of rising rates to loans and other assets.
For the Group the difference of 8.4% at December 2018 between the transitional CET 1 ratio in the baseline scenario (16.1%) and the transitional CET 1 ratio in the adverse scenario (7.7%) is primarily due to:
- The lower GDP growth (cumulatively 10.4% lower) in the adverse scenario which, together with other aspects of the common methodology, has resulted in an increase in the level of defaulted loans for the Group. In the adverse scenario defaulted loans are assumed to increase to over €18bn at December 2018 (from €10.6bn at December 2015). Impairment charges in the adverse scenario average c.€1bn per annum during the period 2016 – 2018. In addition no interest income has been recognised on the increased level of defaulted loans.
- The assumption of a static balance sheet means that assets such as the low yielding Irish tracker mortgages and liabilities such as the Contingent Capital Note (fixed coupon of 10%) which mature within the exercise are assumed to be replaced with similar (duration, price etc.) assets and liabilities.
- The assumption of an increasing cost of funding has led to an additional cost on the Group’s current accounts and other customer deposits with a constrained pass through to loan assets.
- Partly offsetting the above assumptions is the impact of assumed higher interest rates on the Group’s pension deficit.
As can be noted from the EBA disclosures in respect of the Group, the overall impact of the adverse scenario is that the average annual Operating income recognised during the period of the adverse scenario is c.36% lower than the 2015 level of Operating income; the average level of annual impairment charges is c.350% higher than the charges incurred in 2015.