Irish Banks gloom as the Celtic tiger fades

“The party’s over” is the favourite phrase among economic commentators after 10 years of rapid growth, a buoyant stock market, record house prices, near-full employment and ballooning private-sector credit.
But while economists don’t see an end in sight to the souring of sentiment toward the Irish stock market, they say the terrible performance is a massive overreaction if you examine the fine print of Ireland’s economic fundamentals.
Davy Stockbrokers Head of Research, Robbie Kelleher, who will host a conference on the Irish equity market in New York on January 8, said price-to-earnings ratios of some Irish companies are down to levels not seen in 20 years.
The reason? Ireland, he said, has been caught in a double whammy of the international liquidity crunch and residential housing slowdown, meaning that banks and construction stocks have taken a battering.

Allied Irish Banks and Bank of Ireland shares are projected to fall by another 40% this year, according to some analysts.
Ireland’s decade-long Celtic Tiger economy not only ran out of steam in 2007, but it also bled copiously if you judge by the woeful performance of stocks here.
After outperforming most major global indexes over the last several years, the Irish Stock Exchange was one of the weakest-performing markets in the world in 2007, falling over 26% to 6917 since January in a wave of short-selling.
The exchange has had its worst performance since the 1974 oil crisis or the September 11, 2001, attacks on the US And after breaking the 10,000 level for the first time, the ISEQ had the worst fourth quarter since the 1987 market crash.
Domestic blue-chip financials make up a hefty 40% of the ISEQ Overall Index, while construction accounts for around 20%, and fickle investors are turning away from both these sectors as Ireland’s housing boom comes to an end.
“The ISEQ is heavily influenced by financial stocks and there has been great negativity toward Ireland as a place to invest,” said Kelleher. “The adjustment to the slowing hosing market is overdone.”
“There is a theory that the Irish economy is going to implode in 2008,” he added, “and that Allied Irish Banks and Bank of Ireland shares will fall by another 40% in 2008, which we don’t think is not going to happen.”
In November, Bank of Ireland (IRE) cut its growth projection in underlying earnings per share for its fiscal year to a high-single-digit rate from previous guidance of growth in the low double digits.
The announcement cast a pall on all financial stocks. “The world has changed since August 9,” said Bank of Ireland chief executive, Brian Goggin, referring to the beginning of the severe tightening in global credit conditions. But he insisted that fundamentals remain strong.
Investors in financial stocks also took fright earlier this month when Irish Life & Permanent said 2008 operating earnings could be flat, slightly ahead or even down by a “high-single-digit” percentage depending on funding costs.
Since January, Allied Irish Banks shares have fallen 31%, Bank of Ireland fell 42%, Anglo Irish Bank plummeted 32%, while Irish Life & Permanent dropped 43%.
The declines came despite some strong performances in 2007. Anglo Irish Bank, for instance, reported a 52% rise in full-year net profit to 998mn euros, while Bank of Ireland posted a 27% rise in first-half net profit last month to 926mn euros.
Subprime mortgages amount to around 3% of the total at the peak in Ireland, compared with 24% in the US in both 2005 and 2006, while wage growth and mortgage interest relief have helped offset increases in interest rates.
Building materials maker CRH, which makes up about 13% of the Irish market, fell 25% this year, despite the fact that only around 6% of its profits originate in Ireland and just 9% come from US residential construction.
A company with activities in 28 countries, CRH posted a 27% rise in first-half pre-tax profit attributable to shareholders to 504mn euros, but even that wasn’t enough for investors taking flight from companies based in Ireland.
Still, there have been other stock-specific afflictions, such as the 50 consecutive days of rain last summer, which drinks group C&C said washed out their cider sales.
C&C shares are down a whopping 69% since January.
Economists have likened Ireland to Spain, which also began to suffer a construction meltdown in 2007. As in the Spanish case, the Irish construction woes were enough of a catalyst for international investors to unload their stocks.
The Economic & Social Research Institute said house prices here are overvalued by about 15%. They fell an average of 6% in 2007, versus 12% growth in 2006, but rents rose 12% in the third quarter this year, suggesting still-healthy demographics.
The ESRI paints a gloomy picture for 2008, forecasting the slowest rate of expansion in 16 years, or just 2.8% growth in gross national product, mainly because of the construction industry’s rapid slowdown.
GNP excludes the profit from multinational companies based in Ireland, while gross domestic product includes that profit. US multinationals are credited with fueling the Irish economic boom of the 1990s.
The construction industry makes up one-eighth of national output and employs 12% of the work force, with the services sector employing most of the 100,000-plus immigrants from Eastern Europe who arrived in the last year. Both Spain and Ireland have had high levels of private-sector credit growth, but Ireland has a higher savings ratio than Spain, and still has one of the lowest unemployment rates - 4.6% currently - in the E.U.
Ireland also hosts the European headquarters of major US firms, including Microsoft Corp, Intel Corp, Dell Inc, Google Inc (GOOG) and International Business Machines Corp (IBM).
Also, noted IIB Bank chief economist Austin Hughes, Ireland’s population – up 2.5% in 2007 to 4.3mn, mainly due to immigration – is growing five times faster than the rest of Europe, another positive sign.
But Finance Minister Brian Cowen last month unveiled a conservative 2008 budget that essentially predicts the dying days of the Celtic Tiger, predicting real GDP growth of only 3% – respectable by EU standards - and a rise in unemployment to 5.5% next year.
While slower growth is immensely preferable to recession, the forecast has done little to cheer the Irish markets, leaving traders feeling powerless and fearing that this small, export-dependent economy could really start to suffer in the New Year, especially if the global credit crisis pushes the US toward a recession.
“We’re in a tailspin,” said one trader who spoke on condition of anonymity. “Investors just see slowing growth, which creates a vacuum. All we can do is batten down the hatches and wait until the earnings season in the spring.” – Dow Jones Newswires

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Irish Banks gloom as the Celtic tiger fades