Irish bank stocks, which outperformed their UK and European peers in 2002, have been a disappointment for investors this year but could yet deliver better returns, according to a new report.
Research compiled by Davy Stockbrokers suggests that the recent rally in bond and equity markets may not be sustained and could trigger fresh interest in the well-capitalised Irish bank stocks in the months ahead.
Davy, which acts as brokers to its parent Bank of Ireland as well as First Active and Irish Life & Permanent, is forecasting a possible 20 per cent increase in the price of AIB and Bank of Ireland shares. Davy analysts, Ms Emer Lang and Mr Scott Rankin, are signalling that AIB's share price will rise from current levels of around €12.80 to €15.24 while Bank of Ireland's price has the potential to rise from around €10.30 to €12.31.
The Irish financial stocks fell out of favour largely due to some switching by investors into more highly geared wholesale bank stocks but Davy believes this may reverse.
"As European economies continue to struggle we believe that markets could falter in the coming months. When that happens, we believe the more defensive Irish banks will once more come to the fore, particularly given the gap which has now emerged in relative ratings," according to the report.
Bank of Ireland is trading at a discount of around 17.5 per cent to its peer retail banks and nearer to 24 per cent against the European bank sector when compared on a price to earnings valuation.
The analysts suggest that an added attraction for the Irish banks is the strength of their capital bases relative to their European peers which gives them ample fire-power to pursue their buy-back strategies.
Across Europe the report notes the challenging environment facing financial institutions largely exacerbated by rapidly falling interest rates. The focus now is on cost management and capital management as the opportunities for profit growth are challenged.
"It is probably fair to say, against the background of buoyant market conditions, Irish banks arrived later to the cost-cutting party than most. Cost growth was simply not a pressing issue when revenue growth was comfortably in the mid to high-teens," the report states.
