AIB star performer in bullish banks

Shares in Allied Irish Banks rose to a new high on the Dublin market yesterday, as money continued to flood into Irish financial stocks from European investors.

AIB shares came off their high during the day of #18 (£14.17) but still closed up 30 cents on #17.60 (£13.86). Bank of Ireland was also in heavy demand after under-performing AIB since the beginning of the year and the shares soared 98 cents to #19.70 (£15.52). Unlike AIB, however, Bank of Ireland is still well short of its #21 (£16.54) high of earlier in the month.

There were some suggestions that part of the reason for the sharp rise in AIB shares - up 14 per cent since the beginning of the year - is based on take-over speculation. This, however, has been discounted by market sources in Dublin who believe that any take-over of an Irish bank is unlikely until there has been a far greater level of consolidation in the banking sectors within individual countries.

At yesterday's closing level, AIB has a market value of #14.9 billion (£11.7 billion) and this would put it out of the reach of all but the largest EU banks such as ABN-Amro, ING, Deutsche Bank or Commerzbank. Any bid for AIB would have to be pitched at a big premium to the current share price, and value AIB at close to £15 billion. "This is highly unlikely," said one market source. Irish institutional investors would also be reluctant to countenance a bid which could conceivably leave them with more than £11 billion but with only limited investment opportunities for this cash.

In the past week, there has been a big bank merger in Spain with Banco Central linking up with Banco Santander while there has also been speculation of a merger in France between Societe Generale and BNP. Analysts believe the first stage of the consolidation of the EU banking industry is likely to take the form of mergers between banks in the same country before cross-border mergers and acquisitions become commonplace.

Already in Ireland, Irish Permanent and Irish Life are to merge while TSB and ACC are expected to merge and float on the market next year.

Dealers said most of the buying interest in AIB is still based on the bank's presence in some key European stock indices, particularly the Dow Jones Euro Stoxx 50 where it is the only Irish stock. "The buying has been technical - index funds have to buy AIB to get a proper weighting within the Euro Stoxx 50," said one analyst.

"In any event, AIB is currently trading on 23 times 1999 earnings forecasts and that makes it difficult for banks to bid without suffering earnings dilution."

He added that in the shorter-term, a bid for the merged Irish Life & Permanent, Hibernian or Anglo Irish Bank were far more likely prospects than an outside bid for AIB or Bank of Ireland.

(# - Euro)