Investor/An insider's guide to the market:Irish bank and insurance stocks have put in a somewhat lacklustre performance in the opening months of 2007. Bank of Ireland and Irish Life & Permanent are down slightly so far this year while AIB's and Anglo Irish Bank's share prices are up a little.
Up to recently, the performance of the European bank sector has also been lacklustre. However, the announcement by Barclays Bank that it was in talks to merge with ABN Amro to create the world's fifth largest bank gave the sector a shot in the arm.
Over one and five-year periods, Irish banks have outperformed the European sector by a considerable margin but the slowdown in the Irish housing market is having a negative impact on sentiment towards Irish financial stocks. Data series such as housing starts, housing completions and mortgage-related credit growth all now indicate that 2006 will have been the peak for residential construction.
Nevertheless, what seems to be in prospect is a soft landing, with house completions declining modestly in 2007 and 2008. Allied with this is a much slower rate of prospective annual house price inflation in the 0-5 per cent range. This will still translate into growth in gross new mortgage advances in excess of 15 per cent in 2007 and 2008.
Given the importance of the construction sector and the Irish obsession with property investment, it is not surprising developments in the mortgage market should receive a high profile.
What is often not fully appreciated by investors is that the proportion of the Irish banks' profits attributable to mortgage business is relatively small. In fact the capital markets arms of both Bank of Ireland and AIB generate a multiple of the profits generated by their respective mortgage books.
Capital market activities have been booming over the past five years and the two main Irish banks have enjoyed compound annual growth in profits in the region of 20 per cent from such businesses. Investors in the Irish banks therefore need to give more weight to developments in international lending conditions than to developments in the Irish mortgage market. At its recent investor day Bank of Ireland stated that momentum remains strong in corporate banking.
This investor day followed a positive trading update last week. Despite this its share price has since underperformed. At the current share price of €16.70 the stock is trading on a prospective 2007 dividend yield of over 4 per cent and a price earnings ratio of just over 10. This looks quite cheap relative to AIB and the European sector average and therefore in the run-up to its May results Investor expects the shares to recoup much of this recent underperformance.
