Irish bank shares have suffered sharp swings in their share prices today as investors digested the Government’s decision to purchase high-risk loans.
In the first two hours of trading in Dublin shares in AIB fell 37 per cent while Bank of Ireland shares dropped 32 per cent to 65 cent.
However, by late afternoon Bank of Ireland had recovered to 86 cent, a drop of 10 per cent on the day and AIB rebounded to €1.19, off 7 per cent. Irish Life and Permanent – which is seen as less exposed to risky assets – was trading at €1.80, a gain of over 9 per cent on the day.
Volumes were strong with almost 17 million shares in Bank of Ireland traded in Dublin and London and 15 million AIB shares.
Ratings agency Moody's also downgraded its ratings on 12 Irish banks today in a move that undermined sentiment further.
The European Union's executive arm said the Irish Government had taken "decisive, broad-based action" in its Budget to bring its exchequer deficit below an EU limit of 3 per cent by 2013.
Brokers said it was a “matter of opinion about whether the new assets management agency will be positive or negative” but said it did raise the question of whether the banks would require additional capital.
“The likelihood is that we are going to end up with an RBS situation”, said one. Almost all the share trading was from retail investors with very few big institutional orders.
They described the share-trading in banks this morning as “panic selling until around 10.20am”.
Yesterday the Government said it would create an asset management agency to buy up to €90 billion in impaired property and development loans in a bid to repair the banking system and allow them to start lending again.
The National Asset Management Agency will buy impaired assets at a discount and will operate under the National Treasury Management Agency.
While Minister for Finance Brian Lenihan said the assets will be purchased at a discount he did not indicate how much the State would pay.
The impact of this purchase of assets will result in a very significant increase in gross national debt with the Government saying the cost will be offset over time from the sale of the assets.
Moody's increased its expectation of losses on 12 bank loan portfolios due to continued deterioration in real estate prices, the likelihood of more corporate defaults and the erosion in residential loan performance.
"We believe that these losses are likely to significantly weaken the capital positions of most Irish banks and building societies over the next two years," Ross Abercromby, Vice President and lead analyst at Moody's for the Irish banks, said in a statement.
The impact of the Moody’s downgrade on 12 banks was largely dismissed by brokers who noted that the ratings agency was merely catching up with downgrades issued by other agencies and said the move had been anticipated and factored into the market.
Moody's expect the main beneficiaries of this new support scheme to be Allied Irish Banks and Bank of Ireland. It downgraded the Bank Financial Strength Rating (BFSR) of both to D with a developing outlook, from C negative outlook.
The banks mentioned by Moody’s include AIB, Bank of Ireland, ICS Building Society, EBS Building Society, Irish Life & Permanent, Ulster Bank Limited, Ulster Bank Ireland, First Active, Bank of Scotland (Ireland), KBC Bank Ireland, Zurich Bank and Irish Nationwide Building Society.
