Huge losses forecast for AIB and BoI

AIB and Bank of Ireland are facing combined losses of €1.6 billion plus over the next two years, a new report forecasts.

Shares in Bank of Ireland and AIB fell significantly following the revised forecasts from leading analysts in Davy Stockbrokers.

As the ISEQ closed down over 0.6%, AIB ended down 6 cents — a fall of 5.57% to €1.09, while Bank of Ireland also fell following the sharp change in forecasts.

BoI lost 3 cents to close at 62 cents — a fall of 4.62% — while Irish Life & Permanent & was the gainer among the banks — up 12 cents to €1.72 on the day.

The outlook for the two banks has worsened sharply since they last indicated they would make profits in 2009 and 2010.

AIB could return a loss of up to 85 cents per share in 2009, compared with a previous Davy estimate that the country’s biggest bank would generate earnings per share of 18 cents in the current year.

Projected losses for AIB before tax in the two years will be €424 million and €425m against a profit of €1.2bn in 2008.

Bank of Ireland is likely to report a loss of 63 cents a share for 2009 and a further loss of 62 cents the following year.

Irish Life & Permanent will be the only Irish financial stock to make a profit in the period, it said.

As a result of the collapse in the property market and severe credit restrictions, operating profits between 2007-2010 will fall 20%, according to the analysis.

Over the three years 2008-2010, AIB faces an accumulated bad debt charge across all categories of lending of 4.61%, against 4.13% at Bank of Ireland while the total figure for Anglo Irish Bank will be more than 7%.

IL&P’s charge is less than 1.5% due to its low exposure to developers. The figures overall are “far higher than guidance or consensus estimates”, Davy said.

The biggest changes in bad debts relate to construction and property lending in Ireland and Britain as previously indicated.

The report is assuming cumulative losses of 20% over the period against 14% previously.

The 20% tally complies with experience of previous property crises, Davy said.

Overall, Davy warned the new total on property write-offs could still top the revised figures.

Estimates of first-half losses were low for 2008.

With economic conditions much worse “we are very conscious that even our new numbers contain significant downside risk until conditions show signs of stabilising,” the group said.

Specifically on the share prices of the banks, the analysis said their future direction “is as much about the market’s confidence in the Irish state as it is in the banks themselves”.

“In recent weeks, the image of Ireland Inc has been battered by the Anglo revelations and the speculation in relation to the state’s ability to pay its way over the next few years” and is keeping investors nervous about investing.

Buying shares in the banks right now leaves investors open to a 100% loss if the banks are nationalised.

On the up-side, the return could be up to five times if the banks get back to normal trading.

However the restructuring package still has to be put in place and investors could face a seven-year wait before they start to see any real return on their money, Davys warned.