Davy cuts share price targets by 14.5%

SHARE price targets for Irish banking stocks have been cut by as much as 14.5% by Davy Stockbrokers in a dramatic re-evaluation of the sector.

And yesterday Irish bank shares took another big hit following the publication of the report: €1.3 billion was wiped off the value of the ISEQ financial index which was down 2.68% at the official close.

Some €2.23bn was wiped off the ISEQ, which was down 2.34%. Bank of Ireland Plc fell 3.2% to €12.92 in Dublin. Allied Irish Banks Plc’s (AIB) shares lost 4.1% to €18.59. The Bloomberg Europe 500 Banks & Financial Services Index declined 2.2% to 262.65.

A report on Irish financial stockers written by Davy’s financial analysts Emer Lang, Scott Rankin, Marc McGovern and Niamh Hore pulls no punches: “The turmoil in credit markets has created another head-wind for Irish financials, particularly AIB and Bank of Ireland, which are already reeling from domestic property concerns — price/books have hit new 10-year lows.

“Our working assumption is that recent events mean the modest upside we saw for 2007 earnings has now gone.”

With the house building downturn starting to lead to job losses, Davy said their focus moves from volumes to bad debts.

“While we are not expecting a spike, a 15bps-20bps pick-up in bad debts, when combined with the volume slowdown, would now put downside pressure on our (below-consensus) 2008 numbers,” they add.

Davy stresses that while it is cutting its price targets, current valuations suggest stocks are cheap — but poor newsflow will make “progress hard”.

“The good news is that Irish financials should be less affected by global credit market trends than their peers. Investors are not recognising this right now, which looks unduly harsh. Current share prices factor in much more downside to numbers than we can envisage at present (0%–5%),” the team states in a document circulated to clients yesterday.