Goodbody chief economist Dermot O’Leary comments: Economic View; Fitch rating downgrade might be the last - - "With Fitch downgrading Ireland’s long-term credit rating for the third time this year – this time from AA+ to AA - one might suspect that no progress has been made on returning the public finances to a stable footing. This move was largely expected though, as the movements in the sovereign bond market were small. We think the more significant takeaway from Fitch’s decision yesterday was the fact that it "does not expect Ireland's credit profile to deteriorate further from this level, as reflected in the Stable Outlook". In fact, the rating’s agency is quite complimentary of the policies that are being employed in the public finances and on the banking sector, saying that it notes the “vigour” of the fiscal consolidation to date and the likely success of NAMA in “rehabilitating the banking sector”.

The rating downgrade largely reflects issues we have known about for some time, namely the sharp drop in economic activity and the likely subdued recovery over the coming years because of high private sector debt levels. More important though is where Ireland goes from here. The Government now knows what it needs to do to get the backing of the ratings agencies and the sovereign debt investors. Formal passing of NAMA legislation and the Budget on December 9th are the next steps. Successful negotiation may mean that this is the last downgrade from this particular agency."

Goodbody's Eamonn Hughes comments: Bank of Ireland; Lifting the underweight - - "Our headlines estimates for BOI are broadly unchanged. However, the two most important factors on investor’s minds about BOI at the moment are (i) what is the NAMA haircut and when will we know it? and; (ii) given the growing importance of EU policy in a post-ING, post-UK banks world, what will the EU say about BOI’s business plan? On the first point, our sense is that BOI’s language on its likely NAMA loan haircut was more vague than earlier utterances, but given the work we have performed to date, we are sticking with our 18% gross haircut estimate. On the second topic, the small size of Ireland begs the question as to whether the EU may look at the business plans from all the Irish banks in unison, or at least the two large banks, so while BOI appears to have a head start on its peers, this may delay timelines. Therefore, a resolution on both counts probably drifts into Q1 next year, at the earliest.

Since July, the share prices of AIB & BOI have moved in tandem, with no more than a 5-10c differential each day (see chart below right). We believe this tells us the market hasn’t grasped the capital requirements and normalised earnings at either bank and drifting timelines on NAMA and EU judgements ensures these trends may continue for the foreseeable future. We estimate that BOI needs to raise €2.4bn of equity at some stage in order to reach our 8% core equity target over the next number of years. This equates to 1.35x its current market capitalisation may which may be a big ask and raises the risks of government involvement when one considers that even the jumbo £13.5bn Lloyds rights issue is just 0.6x its market cap. It is also clear that the Irish banks will be coming to the market for equity after many peers have already addressed their capital requirements. So substantial risks remain in place for the Irish banks and the beta of 2.8x for BOI against the E300 Index indicates the stock is simply a leveraged play on wider markets, a point reinforced by our current estimated COE of 21%. Having said all that, while BOI bounced by 25% yesterday, it’s still down 50% from its recent high only a few weeks ago, so our sense is that many of these risks are being discounted in the price."

Goodbody economist Deirdre Ryan comments: Economic View; Outward migration picking up pace  --"Labour market developments have always played a significant role in determining migratory flows in Ireland. When jobs were plentiful inward migration increased rapidly, with net migration peaking at c.67,000 in 2007. With the labour market having deteriorated extensively since and remains in a critical state, this factor appears once again to be coming to the fore according to the latest Live Register data. For the first time since March 2007 the number of people on the Live Register fell in October, with 3,000 less persons signing on last month. This led the annual rate of increase to ease to 62%, an 11 month low.

The details show the fall in the Register was led by males, who accounted for three quarters of the drop in the month. Males have been more adversely affected by the collapse in the labour market than females. At the peak, the increase in males on the Register reached 103%, relative to a peak rate of increase of 78% for females. Furthermore the QNHS for Q2 indicated a male unemployment rate of 15%, relative to 8% for females. However, these latest numbers suggest that some of these males are choosing to exit the labour force given the weak labour market conditions that are expected to persist for a number of quarters to come. The more detailed Live Register by nationality, (to be released on Friday), will likely indicate that this is due to the return migration of previous immigrants, as the number of non-Irish nationals on the Register declined in each of the three months to September.

However, the pace of outflow appears to have increased according to yesterday’s data. PPS allocations also point to slowing inward flows, with new allocations down by two thirds in the third quarter. In all, it is clear that net migration will significantly exceed the -7,800 recorded in the year to April 2009. However, there are some positives to be taken from this reduction in the labour force that is occurring. Firstly it may serve to limit the eventual increase in unemployment. We are forecasting a peak unemployment rate of 14%, with yesterday’s data pointing to a rate of 12.5% in October. Secondly, outright declines in the number on the Live Register will alleviate some pressures on the public finances in 2010, at a time when current spending is under severe constraints."