AIB's key capital ratio would dip just below the average 10.4% of other European banks in a severe adverse economic shock scenario, EU wide bank stress tests have revealed.
However, overall the European Banking Authority (EBA) tests found that both it and Bank of Ireland would have enough capital to cope with a significant hypothetical downturn.
The EBA exercise, which tested 70 banks across Europe, found AIB's transitional Common Equity Tier 1 (CET1) capital ratio, an important measure of a bank’s financial strength, would fall to 9.95% in 2025 under a three-year severe downside scenario.
AIB’s CET1 ratio was sitting at 17.9% at the end of 2022, the base year used in the stress test.
The exercise predicts the CET1 ratio would have fallen to 14.07% this year, 11.56% next year before reaching the 9.95% in 2025, in the adverse scenario.
That would include a decline of 6% in GDP across the EU over the three years, large drops in commercial and residential property values, increasing interest rates, higher credit spreads, increased unemployment, as well as an assumption of persistent inflation.
AIB said the 9.95% result in the adverse scenario is well above the ECB’s regulatory capital requirement of 6.05% and it does not intend to take any action on its capital arising from the findings.
"Our result of 9.95% fully loaded CET1 in the EBA's hypothetical adverse scenario demonstrates our high capital base and capital resilience in the face of one of the most severe EBA adverse scenarios to date," said chief financial officer, Donal Galvin.
"Capital depletion of 6.3% marks an improvement on the 2021 exercise, despite this test being more severe."
"AIB continues to be very well-capitalised with a CET1 ratio of 15.7% at H1 2023 which remains substantially in excess of regulatory requirements."
The tests also found that Bank of Ireland’s transitional CET1 ratio would weaken to 11.73% in 2025 under the adverse set of circumstances, from 16.13% last year.
The level of depletion is an improvement on its performance in the last tests in 2021.
"This improved performance reflects actions the Group has taken to enhance its business model and the improved resilience of the Group's capital to stress scenarios," Bank of Ireland said in a statement.
"The Group's capital position is strong and the Group continues to organically generate capital."
Two other Irish registered banks are also included in the test results.
Barclays Bank Ireland was projected to have a 6.77% CET 1 ratio in 2025 under the adverse scenario, down from 16.72% in 2022.
While the analysis estimated that Citibank Holdings Ireland Limited would see its CET1 ratio fall to 17.26% in 2025, down from 20.49% last year, under the same set of pessimistic assumptions.
Taken as a whole, the Irish banks CET1 ratio would fall to around 12% under the adverse scenario, from over 18% in 2022.
Overall, the stress tests found that EU banks remain resilient to the adverse shock scenario.
The EBA said this was reflective of their solid capital position at the start of the exercise, with an average CET1 ratio of 15%, allowing them to withstand capital depletion under the adverse scenario.
It said higher earnings and better asset quality at the start of this year both helped to moderate the capital depletion under the unfavourable scenario.
The authority said that despite having combined losses of €496 billion in such a situation, the banks tested would have enough capital to continue operating at a time of severe stress.
The EBA said the test does not contain a pre-defined pass or fail threshold.
"It is, however, an important input for the Pillar 2 assessment of banks by their supervisors," it said.
"The results of the stress test will assist Competent Authorities in assessing banks' ability to meet applicable prudential requirements under the stress scenario and form a solid ground for discussion between the supervisor and the individual banks on their capital and distribution plans, in the context of the normal supervisory cycle."
The 70 banks tested by the EBA, in a multi-layered process that was launched in January, cover some 75% of the EU banking sectors assets.
The sample includes 20 more banks than the last time the tests were carried out and a number of new enhancements were added to the analysis.
The decline in GDP deployed in the adverse scenario stress test is the most severe ever used in the EU-wide stress until now.
