Irish banking shares feel heat after Sinn Fein's strong election showing

2/2 © Reuters. Ireland's national election 2/2

By Thyagaraju Adinarayan and Padraic Halpin

LONDON/DUBLIN (Reuters) - Irish stocks (ISEQ) fell as much as 1.3% on Monday, dragged down by banks, after left-wing party Sinn Fein secured almost a quarter of first-preference votes in a weekend general election.

Bank of Ireland (I:BIRG) and AIB Group (I:AIBG) were among the top fallers across Europe, sliding more than 7%, as investors feared a negative impact from Sinn Fein's policies, which include an end to tax breaks for banks.

"Sinn Fein's manifesto contained a range of more radical policies on banking and housing," Davy Research analyst Conall MacCoille said in a note to clients.

The left-wing party was ahead of the centre-right Fianna Fail and the Fine Gael party of Prime Minister Leo Varadkar in an election analysts described as a seismic shift away from Ireland's century-old, centre-right duopoly.

A significant difference in the manifestos of the three main parties reduces hopes among investors for a smooth formation of government.

MacCoille said Sinn Fein, who demanded inclusion in Ireland's next government, may end up compromising on some of these policies.

Both Fianna Fail and Fine Gael insisted ahead of the election that they would not govern with Sinn Fein. While Fianna Fail's deputy leader said on Monday that it was "completely premature" to talk of forming a coalition government with Sinn Fein, he said it would talk to its left-wing rival.

"There is no certainty that a government will be formed at the end of these discussions and another election cannot be ruled out in the coming months," Dermot O’Leary, chief economist at Goodbody Stockbrokers, said.

Fianna Fail's finance spokesman Micheal McGrath told Reuters last week that he would not make any changes to the treatment of the Deferred Tax Assets -- a method in which Irish companies use historic losses to offset taxes on current profits.

Ireland's finance ministry said late last year that DTAs were worth 2.2 billion euros ($2.4 billion) to Bank of Ireland, Allied Irish Banks and Permanent TSB, lenders bailed out by the state after they racked up big losses during a banking crash a decade ago.

Meanwhile, real estate stocks such as Irish Residential Properties (I:IRES) and Glenveagh Properties (I:GLV) also took a beating on Sinn Fein's housing policies that include abolishing the 'Help-to-Buy' scheme and imposing a rent freeze.

($1 = 0.9147 euros)