International investment bank Citi (formerly Citigroup) has published a negative report on Irish banks, cutting its recommendation on both Anglo Irish Bank and Bank of Ireland from hold to sell.
Citi says deteriorating credit quality is its biggest concern for the Irish banking sector arising from their exposure to the Irish and UK property. Citi says slowing loan growth is already factored into expectations.
The bank's equity research division says the greatest downside risk to earnings and to tangible book values relates to Anglo Irish Bank. It says 80% of the bank's loans are secured against Irish and UK commercial property.
Bank of Ireland also attracts significant concern because 71% its loans relate to Irish and UK properties while it is also active in the UK buy-to-let market. Citi says there is evidence of rising arrears in this sector.
It has lowered its price target for Anglo Irish Bank to €6.70 euro and to €6.60 for Bank of Ireland.
Citi says AIB Group is more resilient to downside risk and therefore it maintains its hold recommendation for the share, although with a reduced target price of €11.60.
Meanwhile, Merrion Capital says that Irish Life and Permanent's funding profile is overstretched and its deposit growth is unlikely to be sufficient to address the imbalance.
Merrion says that the UK mortgage business looks increasingly non-core and its disposal should be considered.
However it adds that it does not anticipate a rights issue from IL&P and that the lender's current dividend looks sustainable. It says it is maintaining its hold rating.
Shares in all the financial stocks closed lower in Dublin. Anglo Irish Bank slumped 36 cent to €7.50, while Bank of Ireland was down 50 cent to €7. AIB dropped 30 cent to €12.04, while shares in Irish Life and Permanent were also lower, down 19 cent to €10.06.
