IRISH FINANCIAL stocks have tumbled from their peak valuations and have yet to find a floor - as demonstrated by the sector's continuing weak performance this week. Never try and catch a falling knife is an old Wall Street adage, often quoted to dissuade the foolhardy investor: namely, those tempted to call a bottom in a volatile financial market.
The cautionary investment advice still applies. For market sentiment, in Ireland as elsewhere, remains negative and investors are understandably apprehensive given the range of global economic and financial uncertainties. The future prospect of stagflation, a combination of weak economic growth and rising inflation, is now allied to the current reality of rising global interest rates and an unresolved credit crisis. This potent cocktail offers nervous investors little short-term encouragement of an imminent market recovery. Financial stocks are most exposed to such uncertainties and, as we have just seen, are vulnerable to sudden shocks and sharp adjustments in their value. So far, international banks have reported writedowns of $400 billion and that figure appears certain to rise much further.
The catalyst for the latest heavy fall in Irish bank stocks has been a pessimistic report on the sector by a US financial analyst. That report said that Irish banks, given their current capital ratios, would have to raise more new capital under the Basle 2 accord than most other European banks. Last year the Bank for International Settlements set increased capital requirements for banks to ensure they are adequately financed and to underpin the stability of the financial system. Bank of Ireland said on Wednesday that it raised €1.25 billion in longer-term funding, and at a competitive price, in what was the first fundraising by an Irish bank in the past year. Yesterday, Irish Life Permanent reduced its earlier estimate of group operating profits even further below its 2007 figure.
One uncertainty for Irish banks is their exposure to bad debts arising from difficulties in the property market, particularly the commercial property sector. There, some financial analysts expect prices may fall by some 20 per cent before stabilising. The banks, however, seem well protected against a significant rise in bad debts. In general, they are well capitalised. They have provided against non-performing loans. And therefore they should be protected against loan defaults. But the fact that so much lending to business is heavily concentrated in construction and property has taken a heavy toll on the stock market valuations of Irish banks.