Stockbroker lowers share price targets for Irish banks

Ireland's largest stockbroker has lowered its share price targets for the State's main banks by as much as 15 per cent, citing the recent turmoil in the credit markets.

In a research report released yesterday, Davy banking analysts said the market turmoil had created another headwind for the Irish financials, particularly AIB and Bank of Ireland, which were already reeling from concerns about the property sector.

"Our working assumption is that recent events mean the modest upside we saw for 2007 earnings has now gone," the analysts said, adding that while Davy was currently standing by its earnings targets for this year and next, it may yet have to reconsider its 2008 forecasts.

"Our working assumption for AIB and Bank of Ireland is now that any upside potential for this year is gone due to the fall-out in international credit markets, and that there is a meaningful risk that we may have to downgrade 2008 at some point."

The other financial stocks, it said, should not be as affected by events in international markets.

The broker said that perceived risks in the housing market and falling gross domestic product estimates had caused it to take a more cautious approach to the Irish financial institutions back in April, and the recent problems in the global stock and credit markets had vindicated its stance.

While the Irish banks look relatively cheap at current levels - AIB is down 4.6 per cent, Bank of Ireland is down 13.5 per cent, and Anglo Irish Bank is down 9.2 per cent in the past two months - Davy said it was too early to turn unreservedly bullish. "In our view, the buy case relies too much on valuation, and there is now a potential risk to earnings in some cases."

The broker also said it saw Irish macroeconomic newsflow continuing to weaken into the fourth quarter, and pointed out that the negative trend in housing completions was only in its early stages.

"What is happening in the global markets has superseded domestic concerns, and we have little to go on at this stage as to what the damage here could be," the Davy analysts said.

"What we do know is that Irish financials are much less exposed to what is going on than most of their counterparts and, in that sense, they still offer some defensive characteristics."

The broker said one thing that would help the banks in the future was if interest rates were to peak at the current level. The next meeting of the European Central Bank is on September 6th, with recent soundings from the bank giving some hope that a previously-indicated rate rise may be put on hold for the moment at least.

Davy yesterday cut its share price target for Irish Life & Permanent by almost 15 per cent to €20.50; for AIB by almost 12 per cent to €22.50; for Anglo by 10.5 per cent to €17; and for Bank of Ireland by 9.6 per cent to €16.50. Despite the changes, the new targets represent a 14-22 per cent upside from the four main banks' current trading levels, although Davy said it expected the negative newsflow coming down the tracks would make it difficult for the stocks to make sustained progress towards these targets in the near term.

It also lowered its targets for FBD and IFG by 12.2 per cent to €34.50 and 7.4 per cent to €2.50 respectively - about a 30 per cent upside. It said it was no coincidence that these were the two financial stocks with the least exposure to the Irish property market and the global credit markets.