Bank shares weak as government plan unsettles investors

Permanent TSB led banking shares lower in early trading in Dublin as investors digested the draft programme for government, which includes provisions aimed at reducing mortgage costs and imposing court solutions on lenders to deal with soured loans.

Shares in Permanent TSB, which is 75 per cent government owned, fell as much as 3.3 per cent, Bank of Ireland declined by 1.7 per cent in early trading, though both subsequently recovered some of the ground lost.

By lunchtime, PTSB was down 1.3 per cent to €2.55 with Bank of Ireland also 1.3 per cent lower at 24 cents.

"Our first take is that changes are afoot which will negatively impact upon the equity values of the Irish banks, particularly PTSB," said John Cronin, an analyst with Investec in Dublin. "However, it is important not to overreact -- especially in the context of a government that is unlikely to survive for a long period in our view."

The draft programme, which emerged on Thursday ahead of the expected reappointment of Enda Kenny as Taoiseach today, indicates that pressure on banks to cut standard variable mortgage rates will increase, vowing to take "all necessary action" to tackle what it terms as excessive borrowing costs for homeowners. It also commits to a new court to deal with mortgage arrears, with the power to impose solutions on lenders for unsustainable debt.

The new government will also ask the Competition and Consumer Commission to work with the Central Bank to set out the options in terms of legislations and regulation to increase competition and lower the cost of loans.

The document also said the Central Bank will be asked to procure an independent assessment of arrears and negative equity loan books of the banks.

In addition, it said the new government will not sell off more than 25 per cent of AIB before 2019. While the outgoing government had planned to sell a 25 per cent holding in the bank by the end of this year, there is no such commitment in the document to proceed.

While Mr Cronin sees some of the measures are as “aspirational or idealistic rather than changes that will actually be implemented”, he expects that there will be no move to sell a stake in AIB this year, that banks will move to cut mortgage rates as a pre-emptive move and that lenders will effectively be pushed into more debt forgivness.