Once again, Irish banks are at the sharp edge of a global crisis

In 2008, it was the melting away of liquidity. Just over a decade on, it's Covid-19. AIB Group and Bank of Ireland Group are the worst performers in the Bloomberg Europe Banks and Financial Services Index over the past year, as the pandemic amplifies investor wariness toward the lenders.

To an extent, the legacy of the last crisis is shaping investor responses toward Ireland's lenders this time round. After one of the worst real-estate crashes in history, the taxpayer had to bail out the entire sector and remains a key player to this day. The government still controls 71 per cent of AIB, 14 per cent of Bank of Ireland and 75 per cent of Permanent TSB Group.

“Investors have been concerned that the banks could be forced to lend into what is clearly a massive downturn and so be left with significant losses,” Eamonn Hughes, an analyst at Goodbody Stockbrokers, said.

While the lenders operate at arms-length from the state, that message doesn’t always filter through, Hughes said. Last week, a finance ministry official addressed bank investors and analysts online, in what the ministry described as routine “two-way communication with equity investors.”

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“Investors have been concerned that the banks could be forced to lend into what is clearly a massive downturn and so be left with significant losses,” Hughes said.

Bank of Ireland shares have lost 49 per cent since March 1st. AIB has dived 44 per cent and Permanent TSB has dropped 40 per cent. AIB shares closed at €1.17 ($1.28) on Monday, far below the €4.40 per share price when the government sold a stake three years ago, in what was meant to be a key step in the gradual unwinding of its bank stakes.

Instead, the government has remained a significant shareholder across the sector, leaving it vulnerable to political crosswinds.

“Irish banks have been on the wrong end of investor sentiment for some time, be it due to Brexit, weak lending, low interest rates or domestic politics,” Stephen Lyons, an analyst at Dublin-based securities firm Davy, said. “That negativity has impacted on market support into an uncertain coronavirus outlook.”

The virus has ripped through one of the most open economies in Europe, and the State is supporting about 30 per cent of the workforce in some form now. That spooks investors, even if only a fraction of those getting aid eventually default on their mortgages.

Going into the current crisis, 8 per cent of mortgages were in arrears. Some 11 per cent have been restructured already, as the effects of the real estate crash lingers.

Concern is also mounting around banks’ business loans – one in four Irish companies have closed during the virus outbreak. Over 14,000 payment breaks to small and medium sized companies are in train, according to Banking and Payments Federation Ireland. On May 2nd, the Government said it would offer credit guarantees for €2 billion worth of loans, below the €8 billion the industry group sought.

Still, the sell-off in Ireland’s two major domestic banks has gone too far, according to Daragh Quinn, an analyst at Keefe, Bruyette and Woods. Last week, the government sketched out a plan to reopen the economy between mid-May and mid-August.

“Both, but especially AIB, are in much better positions than a decade ago,” said Quinn. “AIB’s share price implies very low returns with no dividends ever. Is that realistic?”

"We're among the very best capitalized banks in Europe," AIB chief executive officer Colin Hunt said in an interview. "We also have an extraordinary franchise."

For now, investors remain wary of both firms, especially until the virus is successfully dealt with.

“We are dealing with an unprecedented economic challenge,” said Hunt. – Bloomberg