Irish Banks Over a Cliff

Share prices at Allied Irish Banks, plc (AIB - Analyst Report) and The Governor and Company of the Bank of Ireland (IRE - Analyst Report) have plummeted, dropping almost 16% in morning trading, following release of the Irish government’s bank plan and ratings downgrades by Moody’s.

The Irish government announced the establishment of a "bad bank," under which the government will purchase EUR80-90 billion ($107- $120 billion) of impaired property loans from Irish banks in exchange for government bonds. Critics pointed out that this amount is equivalent to 50% of Ireland’s GDP, with Prime Minister Lenihan admitting that it could be 10 years before the debt might be repaid.

This is on top of the bank recapitalization plan, under which the Irish government is purchasing 25% stakes in Allied Irish Bank and the Bank of Ireland.

In addition, Moody’s downgraded the ratings of 12 Irish banks, including those of AIB and IRE. Moody’s lowered the bank financial strength ratings on AlB and IRE to D from C, citing the likelihood of increased credit losses and erosion of capital adequacy.

Prior to this, the bank shares had traded up from lows reached on March 5, 2009 when AIB traded at $0.76 and IRE hit $0.72. On Monday, AIB shares closed at $3.64 and IRE shares closed at $5.34.

We currently have Hold recommendations on both AIB and IRE. The current Zacks rank for both AIB and IRE is 3, indicating no clear near-term directional pressure on share prices.

(US$1 = EUR0.75)