THE STATE'S two largest banks lost further ground on the the markets yesterday as concerns persist they may not be able to raise capital until negotiations with the EU Commission on State aid approval are completed.

AIB fell by 14 per cent in early trading before closing the day almost 10 per cent lower. The stock fell by 20 cent to [euro]1.67. Bank of Ireland fared better, declining by 5.9 per cent or 10 cent to [euro]1.60.

About eight million shares in each of the banks changed hands.

The financial stocks were driven lower by reports that Royal Bank of Scotland, owner of Ulster Bank, may have to sell more assets than planned to win EU approval for aid from the UK government.

The bank, which is 70 per cent owned by the UK treasury, must prove to the EU Commission that it does not hold a competitive advantage with state aid.

Anna Lalor, analyst at Goodbody Stockbrokers, said the threat of more significant EU requirements may make it more difficult for Bank of Ireland and AIB "to raise equity until there is further clarity on the ultimate outcome of its decisions".

AIB and Bank of Ireland are expected to require fresh capital for losses incurred on the transfer of loans with a combined face value of [euro]39.6 billion to the State's "bad bank", the National Asset Management Agency (Nama).

Emer Lang, analyst at Davy stockbrokers, said investors were "sitting on the sidelines" waiting for the interim results from Bank of Ireland tomorrow.

She said investors would be watching whether the bank changes its [euro]6.9 billion forecast for loan impairments in the three years to March 2011 and its views on future capital requirements.

The bank is expected to rule out seeking cash from shareholders in a rights issue before the end of this calendar year, but it may signal that it will tap investors for further equity next year.

Davy expects the bank to report an underlying pre-tax loss of [euro]1.075 billion in the half-year to September 30th last, compared with a profit of [euro]650 million for the same period last year. It is forecasting loan losses of [euro]1.85 billion in the six- month period - ahead of the bank's most recent guidance of [euro]1.6 billion to [euro]1.8 billion.

Originally published by SIMON CARSWELL Finance Correspondent.

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