THE BLEAK trading statement and severe profit warning from AIB on Wednesday sparked downgrades on analysts' earnings forecasts on the bank and its Irish peers.

All brokers cut their earnings targets for AIB after the bank slashed its own 2008 forecast by more than 35 per cent due to higher funding costs, the bank guarantee charge and spiralling bad debts, mostly on loans to residential developers. Merrion cut its 2008 earnings target by 28 per cent, while Goodbody reduced theirs by 21 per cent. Davy cut its target by 60 per cent for 2009 and 35 per cent for 2010.

NCB went further, cutting earnings forecasts for all four banks by an average of 18 per cent for 2008 and a whopping 102 per cent for 2009. The firm has argued strongly for bank recapitalisations, saying they need to match the state-bolstered UK banks. "We believe that all the bad news for Irish bank stocks has already been discounted by the market. When the Government, or any of the banks themselves, grasp the nettle and deal with the capital issue, the stocks will bounce," said the broker in a research note.

London analyst Alex Potter at investment bank Collins Stewart gave an even gloomier outlook.

He said capital raisings of up to €10 billion "cannot be totally discounted". His preferred stock is still AIB over Bank of Ireland.

He said Anglo Irish Bank was "by far the toughest to call" as he sees it "struggling to generate any profit in the coming two years, even assuming it sees materially lower commercial property loan losses than its peers". He said it was "the most opaque and least profitable of the Irish banks".

He revised his profit targets to reflect "an early-1980s UK recession" for Irish and UK businesses. "This leaves the main two Irish banks seeing significant profit falls." He doesn't expect any cash dividends from the Irish banks for the next 12-24 months.

Expect a tough two years for the banks, even with the guarantee.