Irish Banks Fall After Davy’s Cut on Guarantee Costs

Bank of Ireland Plc and Allied Irish Banks Plc retreated after Davy cut its recommendations on concern amended state debt guarantees may damp profit and result in an outflow of deposits.

Bank of Ireland dropped 5.8 percent to 72 cents at the 4:30 p.m. close in London, while Allied Irish declined 5.1 percent to 76 cents. Ireland’s two largest banks were cut to “neutral” from “outperform” by Stephen Lyons, a Dublin-based banking analyst at securities group Davy, in a report today.

“We assume the guarantee will be extended, the cost of which significantly weighs on our 2011 numbers,” Lyons wrote in the report. An extension in June removed guarantees on corporate deposits with duration of less than three months from the end of September and “could lead to an outflow of corporate deposits, which would put further pressure on funding,” he wrote.

Ireland’s original guarantee, introduced in September 2008, which covered bank deposits and most securities, is scheduled to expire at the end of this month. A second, more limited, guarantee is due to lapse at the end of the year.

Guarantees for short-term bank liabilities, including corporate and interbank deposits, will be extended from the current expiry of Sept. 29 until Dec. 31, Finance Minister Brian Lenihan said in a statement today. The extension is subject to approval by the European Commission.

Lehman Brothers Collapse

Dublin-based Allied Irish and the nationalized Anglo Irish Bank Corp. have asked for the guarantee to be extended beyond this year. The Irish government stepped in to safeguard depositors and bank debt after the collapse of Lehman Brothers Holdings Inc. in 2008 led to a freeze in credit markets.

Concerns surrounding 26 billion euros ($33 billion) of debt maturing this month for the six lenders covered under the guarantees are “overdone” and ignore fundraisings carried out earlier in the year, Lyons wrote in the report.

Standard & Poor’s last month downgraded Ireland’s credit rating to AA-, the lowest since 1995, writing that a bailout of Anglo Irish could cost the state as much as 35 billion euros. The government has injected 22.9 billion euros into Anglo Irish since the lender’s nationalization in January 2009.

“We don’t see Anglo Irish as the feared ‘black hole’” analysts Richard Thomas, Silvia Ardagna, and Sphia Salim at Bank of America Corp.’s Merrill Lynch wrote in a report dated Sept. 2. S&P’s estimate for recapitalizing Anglo Irish is “likely to prove wrong” with the cost set to be about 25 billion euros, the analysts wrote.

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