Bank shares drop after 30pc house price fall prediction
Anglo Irish Bank losts 5pc in yesterday's trading. Photo: Julian Herbert/Getty Images
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BANK shares came under renewed pressure yesterday after international broker Credit Suisse predicted that Irish house prices could fall a further 30pc.
The dire forecast is contained in a review of the outlook for the big banks, with the negative reaction plainly visible in the 6pc falls endured on the market by Bank of Ireland and AIB.
Anglo Irish also came in for heavy selling, dropping by 5pc even though it does not have a large mortgage business.
By the close in Dublin, share values had shed another €2bn, with the overall market dropping more than 3pc and bank shares down by an average of almost 7pc.
The sharp declines came after Credit Suisse cut the share price target for AIB by over 50pc from €15 to €9.50, while Anglo was reduced from €11.35 to €6.
And in what must be extremely cold comfort for stockholders, the Bank of Ireland share price target was left unchanged at €5.
Credit Suisse justified the dramatic cuts by claiming that the market was now looking at book value rather than earnings when it comes to putting a value on Irish bank shares.
It also says the banks here are only now reacting to the credit crunch, tightening up credit lines to potential borrowers by reducing the loan-to-value ratios on their mortgage books.
The upshot is that the impact of the credit crunch has yet to filter through to the Irish housing market, with any weakness already experienced down to a drop in demand rather than tighter credit.
"As a result, we see mortgage affordability decreasing and house price declines accelerating. What is more, the housing market has been underpinned by strong immigration and rental demand, but it now seems likely that immigration trends will reverse and landlords may start to sell," the broker warned.
It goes on to say that house prices could fall a further 30pc, a claim which it says is supported by the International Monetary Fund research suggesting house prices here are overvalued by 30pc.
Construction levels are also set to decline, it says.
"Housing completions are running at an annualised 50,000-55,000 units, but we think a further slowdown in the housing market could trigger a more pronounced contraction in the residential construction industry," it said.
For the banks, such a fall in house prices would result in a big jump in arrears, which could rise fourfold, leading to a substantial 40pc increase in "mortgage impairment" or bad debts.
Shareholders looking for any upside from Credit Suisse were left disappointed. The broker said current share prices may "start to look tempting" but it was still too early to buy Irish bank shares.
- Pat Boyle
