Ireland's big banks benefit most from currency change
The two main Irish banking stocks have been the major beneficiaries of the introduction of the euro as European pension funds have moved to increase their shareholding in both Allied Irish Banks and Bank of Ireland in line with the banks' presence in major European stock indices.
After its 65 euro cent rise on Monday, AIB gained another 57 euro cents yesterday to close on #16.49 (£12.99), bringing its gains in the first two days of euro trading to almost 8 per cent. In London, heavy demand drove AIB up 45p to £11.69 sterling.
That pattern was the same for Bank of Ireland, which gained #1.07 yesterday to #20.17, adding to the 12 cent rise on Monday. This brings Bank of Ireland gains in the first two trading days to over 6 per cent. In London, the shares were up 58p on £14.30 sterling, adding to the 51p gain on Monday. Demand for AIB has been fuelled by the stock's inclusion in the Dow Jones Euro Stoxx 50 index and in the Euro Top 300, while Bank of Ireland has been boosted by its inclusion in the Top 300. This has meant that institutional investors, who traditionally might have ignored the two big Irish stocks, are now compelled to take a shareholding to reflect the banks' presence within the major indices.
AIB is the only Irish stock in the very select Euro Stoxx 50 and is thought to make up around 0.8 per cent of the index, while both AIB and Bank of Ireland are well up in the rankings of the 50-odd European banks that are included in the Euro Top 300.
This means that the Irish banks have, in reality, a captive investment market for the foreseeable future, as it is unlikely that either will drop out of the two key indices.
Domestic holders of AIB and Bank of Ireland are expected to reduce their holding in the shares in line with the banks' presence within the euro zone market. However, dealers said yesterday that most Irish institutions were only slowly and gradually reducing their shareholdings, and this reluctance to sell - together with the demand from overseas - was a technical factor that would continue to drive both stocks ahead.
Another factor is the belief that the European banking sector, which numbers 14,000 different institutions, is in for a bout of consolidation in the next few years. "There is a strong focus on euro zone banks and the sector is seen as very fragmented," commented NCB analyst Mr Shane Nolan.
Even yesterday, Deutsche Bank took a 0.75 per cent stake in Italian group Unicredito, a move described as an investment by Deutsche Bank but seen in the market as a toehold ahead of a possible bid in the next few years.
Moreover, within the euro zone, analysts believe there will be a growing shift in asset allocation from bonds to equities and from domestic equities to euro equities. This may mean many investors in Germany, who traditionally kept a much higher proportion of bonds than equities, will have to shift the investment emphasis.
Investors in the likes of Madrid and Milan, who traditionally had their equity book 100 per cent populated by domestic shares, may now have to alter their strategies to include a significant proportion of euro zone equities. One result of this increased demand for the Irish banking shares from Europe may be a boom in business for Irish stockbrokers. Although both AIB and Bank of Ireland traded heavily in London over the past two days, investors buying in London do so in sterling and thus take on a euro/sterling exchange risk.
This risk can be avoided if the bank shares are bought in Dublin in euros and this absence of exchange rate risk is likely to play a major part in marketing to European institutions by the main Irish stockbrokers.