Friday, 8 February 2008

Irish banks, it seems, are particularly vulnerable to changing sentiment about the state of the Irish economy. With the domestic housing market, a big driver of earnings in the past, now slowing appreciably, the shares have been knocked.
With Bank of Ireland's latest figures, investors "took fright" - the description of Davy, Bank of Ireland's former broking subsidiary - at news that the bank had made an additional Euros 30m charge for loan losses.
Emer Lang, Davy's chief bank analyst, said the annualised impairment charge at 23 basis points of average loans was "still relatively low but investors clearly fear there could be worse to come".
The shares, which topped out in February, are "discounting an outright Irish recession which in our view is unlikely to happen," said Davy
The broker said it was adjusting its forecasts for all three big Irish banks - Bank of Ireland, Allied Irish Banks and Irish Life & Permanent. Irish Life, it says, has a particularly acute ongoing funding problem.
The exception is Anglo Irish Bank, the specialist corporate lender, which reports full-year results on November 28.
Scott Rankin, of Davy, forecasts Anglo Irish will "meet, if not slightly exceed, market guidance". The question for investors in Anglo Irish is what will be the impact of the slowing Irish property market on the bank's 2009 results.
In groping for a bank to measure Anglo Irish against, some analysts have in the past suggested Northern Rock comes closest. But David Drumm, chief executive, believes this completely misunderstands the model. Anglo Irish is not involved in residential mortgages. It is a specialist business lender. It is not dependent on interbank funding, which has been one of the reasons for Northern Rock's liquidity problems. Anglo Irish is a net lender to the interbank market, says Mr Drumm. It relies on personal corporate depositors in Ireland, the UK and from its Austrian bank subsidiary to fund two-thirds of its loan book. Mr Drumm is straining at the leash to be able to tell the bank's story. "It's so frustrating. I can't wait," he says.
He feels the enforced silence of the current closed period, with several hedge funds engaged "in all soWorried investors fighting through the blizzard of bad news surrounding the residential and commercial property markets have started to desert commercial property funds in growing numbers, leaving serious questions to be asked about whether the funds will able to meet the calls for cash.
"I think the longer the negative sentiment goes on, the more likely it is that you will see the exit strategies on these funds closed," says Darius McDermott, the managing director of Chelsea Financial Services, an independent financial adviser. "What investors should understand is that commercial property is a great asset class for the long term but is not something you want to buy or sell on price momentum."
The questions being asked of the retail funds follow on from a similar problem being faced by institutional funds over the past few weeks. Since The Sunday Telegraph broke the story that Schroders, the fund manager, had warned investors that it might be unable to fulfil redemptions within the normal three-month window, UBS and RREEF, part of Deutsche Bank, have also imposed restrictions on withdrawals.
For institutional investors with deeper pockets and longer time horizons, these restrictions, although serious, are not catastrophic. But a similar situation arising in the retail fund community could lead to widespread panic among investors.
"If the liquidity levels in these funds fall much further, managers will start to get very worried," says one property fund manager, who asked not to be named. "They are trapped between an illiquid property market and the highly liquid structure they offer investors. In markets such as these, the two just don't tally."
The concern is mirrored among IFAs. McDermott says: "We have been very cautious on property for a number of years. The problem is that when the door is locked on this market you cannot get your money out - or, if you do, you do not want the prices being offered."



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