Moody's downgrades outlook on debt held by Irish banks

Ratings agency Moody's has downgraded its outlook on bank debt guaranteed by the Irish Government from “stable” to “negative”.

Moody’s said it has changed the outlook on the backed-AAA rated long-term senior unsecured debt securities of the six banks covered by the Government guarantee; Bank of Ireland, Anglo-Irish Bank, Irish Life & Permanent, EBS Building Society and Irish Nationwide Building Society.

Moody’s said the “change in outlook to negative from stable follows the change in outlook to negative from stable on the ratings of Ireland”.

At 3.30pm shares in AIB and Bank of Ireland were both more than 10 per cent lower and have been labouring under a prediction from Davy Stockbrokers this morning that will both be loss-making until 2011.

AIB was 13 cent lower at €1.02, a fall of over 11 per cent while Bank of Ireland slipped to 58 cent, a drop of over 10 per cent.

Shares in both banks have been drifting in recent days on market uncertainty about the extent and timing of the Government’s revised recapitalisation proposal although there is a growing expectation it will be announced before the weekend.

Allied Irish may report a loss of 85 cent per share in 2009, Davy said in its note to clients today, compared with an earlier estimate of a profit of 18 cents a share.

This could rise to a loss of 91 cent a share in 2010 as AIB is forced to make additional provisions to cover the rising cost of bad loans, according to the Davy note.

Davy believes Bank of Ireland may report a loss of 63 cents a share for 2009. Over the next two years Davy says Irish Life & Permanent will be the only Irish financial stock to make a profit.

“We are very conscious that even our new numbers contain significant downside risk until conditions show signs of stabilizing,” Davy said.

Even taking into account a possible €3 billion preference share recapitalisation in AIB and Bank of Ireland Davy’s says “we see core equity levels in 2010 dropping to 4.8 per cent and 4.9 per cent at AIB and Bank of Ireland though core tier 1 will still be over 6.7 per cent and 7.5 per cent respectively.”

Statistics for December showed a 2.2 per cent drop in credit month-on-month and as a result Davy forecast a contraction in the domestic loan books of all banks this year. It notes that “property values are still some way from the bottom”.

Davy said it will readjust its predictions once the recapitalisation proposals are published.