IRISH FINANCIAL stocks shed 4 per cent of their value after investment bank Citigroup downgraded Bank of Ireland and Anglo Irish Bank to "sell" on concerns that bad debts on their property lending in Britain and Ireland would rise.

In a bearish analysis of the three main Irish banks, Citigroup said deteriorating credit quality threatened their earnings as they were "heavily exposed" to property in the UK and Ireland.

Bank of Ireland fell 6.6 per cent to €7 yesterday, while Anglo Irish Bank shed 4.6 per cent to €7.50.

AIB, however, fared better, closing down 2.4 per cent to €12.04.

Brokers also blamed the declines on rising oil, a surge in US jobless figures and lingering concerns that euro-zone interest rates may rise next month.

Citigroup said: "With its business model solely focused on secured commercial real estate lending, it is not a great surprise that Anglo Irish Bank is the most exposed, with 80 per cent of its loan book secured against UK or Irish property."

Citi said Bank of Ireland was "the next most vulnerable" with 71 per cent of loans on British and Irish properties, and "the added concern that the bank continues to expand rapidly in UK buy-to-let mortgages, where there is evidence of rising arrears".

Citi lowered its target share prices for Bank of Ireland to €6.60 and Anglo Irish to €6.70.

It said AIB was "the best diversified of the three banks" and recommended a "hold", though with a reduced target price of €11.60.

It cut its 2009 earnings per share (EPS) estimates for Bank of Ireland by 31 per cent to 108.6 cent and by 18 per cent for Anglo to 121.2 cent, both well below the consensus among Irish analysts.

Davy, the State's largest stockbrokers, is forecasting 2009 EPS estimates of 138.8 cent for Bank of Ireland and 147.5 cent for Anglo.

"With loan growth having already slowed sharply, we see credit quality as the greatest risk to earnings and tangible book values in light of a deteriorating outlook for the UK and Irish economies," said Citi's analysts.

Emer Lang, analyst at Davy, said Citi's report was "a little bit inconsistent" in providing differing estimates on Bank of Ireland and AIB, despite the similarities between their balance sheets.

Citigroup is expecting bad debt charges at Anglo Irish of 0.52 per cent of loans in 2009, and 0.6 per cent at both Bank of Ireland and AIB - higher than consensus estimates.

It speculates on a "worst case" scenario, stress-testing the banks in a situation where bad debts would rise to 7 per cent of loans on British and Irish commercial properties.

In that scenario, it estimates bad debt charges would total €4.5 billion each at Anglo Irish and Bank of Ireland, and €5 billion at AIB, pushing them into substantial losses.

One senior Irish banker dismissed these estimates, saying bad debts were substantially lower during far more difficult economic years in the early 1990s.

In a report on Irish Life & Permanent, stockbroker Merrion says the group should consider selling its British mortgage business, which has €8 billion in loans, as Permanent TSB's funding is "overstretched" and deposit growth is "unlikely to be sufficient to address the imbalance".

"The longer the credit crunch lasts, the more it exposes a structural weakness in banks' over-reliance on wholesale funding," said Merrion analyst Sebastian Orsi.

"It is unlikely IL&P's extreme loans/deposits ratio (288 per cent) can be addressed via deposit growth alone, even over several years."

He said the disposal of the group's UK mortgage business would "partially address the imbalance", despite reducing earnings.