AIB and Bank of Ireland have been downgraded by analysts at Morgan Stanley to reflect declining margins in the Irish banking sector.
The London-based broker has,however, maintained an "overweight" stance on Anglo Irish Bank, which it describes as enjoying "superior-to-sector growth and profitability combined with a sector-type valuation".
The broker argues that progress in "bottom-line profitability" in Irish banks has failed to match what should be a benign market backdrop of robust lending growth, favourable demographic trends and sound credit quality.
It concludes that the "lacklustre" performance is due almost entirely to sharp declines in margins, which have been hit as lending business booms in the prevailing low-interest-rate environment.
The broker acknowledges the "conventional wisdom" that would see margins improving as soon as interest rates begin to rise, but says this view may be too optimistic in the case of Irish banks.
In this light, AIB's price target has been reduced from €13.30 to €12.80. The bank closed at €12.30 yesterday.
Bank of Ireland's new target is €10.90, down from €11.60 and not far from last night's closing price of €10.69.
Morgan Stanley's price forecast on Anglo Irish has remained unchanged at €16.50. This compares with a current market valuation on the stock of €13.74.
Morgan Stanley holds that margin pressures in Irish banking cannot be blamed solely on "balance-sheet" effects such as differing growth rates in assets and liabilities or interest-rate hedges, arguing that competition, particularly within business banking, is a central factor within current margin trends.
The broker bases this in part on calculations that lending to small and medium-sized enterprises (SMEs) accounts for almost 40 per cent of Irish banks' net interest income, while mortgage lending only contributes about 18 per cent.
The broker finds that Bank of Ireland is more prone to "structural" reductions in margins due to recording faster lending growth in mortgages than in other areas. It also suggests that the UK buy-to-let market, where Bank of Ireland has seen strong growth over the past few years, is on the point of slowing.
In the case of AIB, which last week shed almost 8 per cent of its value on the back of margin concerns, Morgan Stanley concludes that the bank is most exposed to "competitive" spread pressures because of its larger presence in the SME market.
Morgan Stanley says Anglo Irish is not exposed to as many margin pressures as the two larger retail banks because of its lack of retail exposure and simpler business model.
The broker says HBOS, which operates in the State through Bank of Scotland (Ireland) can no longer be ignored as an "irrelevance" in business banking.
