Irish banks tumbled yesterday after Europe's largest bank, UBS, cut ratings for the sector as a whole. The Swiss bank cited exposure to an overvalued commercial property sector for the downgrades, writes Dominic Coyle.
UBS said commercial property values could slide by as much as 30 per cent in Ireland - and that figure could rise further if current rents fall, as it says is likely.
The bank also warned that Irish banks are almost certain to have to increase their bad loan provisions.
UBS urged clients to sell stock in AIB and Anglo Irish, where it had previously adopted a neutral stance. It also lowered its rating on Bank of Ireland to neutral, mirroring a move made last month in respect of Irish Life & Permanent.
"We believe there is a 30 per cent downside risk to commercial property values to get yields back to historic levels and that presupposes rents are able to be maintained," analysts Ross Curran, Stephen Andrews and Alastair Ryan wrote in a note to clients. "We believe this presents a significant risk to earnings over the next two years."
Banks led the way as Irish stocks lost as much as 3.4 per cent yesterday before halving that deficit in a late rally. The Irish performance mirrored the situation across Europe, with indices opening lower in the wake of a sell-off in Asia overnight.
The FTSE 100 of Britain's leading shares reversed earlier losses but ended down 1.4 per cent and the Paris CAC-40 index closed off 0.61 per cent. The German DAX fared better, closing fractionally ahead.
In New York, markets were ahead in morning trading on expectations that the Federal Reserve will move to cut rates again tomorrow. The only debate appears to be whether the Fed will knock a further half a percentage point off interest rates a week after a three-quarters of a percentage point cut or whether it will settle for a quarter point.
Peter Hooper, chief economist at Deutsche Bank Securities, said that the Fed built up expectations of a half a percentage point cut through the statement which accompanied last week's emergency cut. The statement said "appreciable" downside risks remained even after the 75 point move and promised "timely" action.
The Fed has made no effort to suggest that the market's interpretation of the statement is wrong.
However, others argue that the unravelling of the Société Générale €4.9 billion rogue trading scandal may have amplified the global sell-off in equities last week and that, with inflation still a concern, the Fed will opt for the more cautious approach.
Expectations of a rate cut pushed the dollar to a two-week low of $1.4792 against the euro. The greenback was also undermined by a government report showing that US new-home sales fell to a 12-year low in December.
Gold rose to a record $929.80 an ounce in New York, enhancing its appeal as an alternative investment. - (Additional reporting Financial Times / Bloomberg)
