Resilient AIB holds value despite delisting and overcharging inquiry

Investor - An insider's guide to the market: The announcement by AIB that the scope of the investigation into overcharging was being widened caused few ripples in the marketplace.

The announcement means that the independent investigators report will not now appear until end-July and, in the absence of any further revelations, AIB should fade from the media headlines until then.

The revelations of overcharging and tax evasion have had remarkably little apparent impact on AIB's share price.

In fact, any recent weakness in AIB's share price has probably been due to its removal from the FTSE Eurotop 100 index as and from close of business on June 18th.

In all, five companies are being removed as constituents of this index of which two are banks - AIB and Abbey National - and they are being replaced by Fortis and KBC.

Inclusion in an index such as the Eurotop 100 usually has a short-term positive impact on a company's share price as index-tracking funds acquire shares in the new entrants.

Likewise, removal from the index will have the opposite impact, as index-tracking funds must sell the shares to rebalance their portfolios in order to continue to replicate the index.

Usually economic and financial fundamentals quickly reassert themselves as the main drivers of a company's share price.

The recent spate of negative publicity surrounding AIB has served to divert attention from the good news that has been emerging from the overall economy.

Some economists are now forecasting a 6 per cent rate of economic growth for the Irish economy this year with further gains likely in 2005.

Prospects for global growth have also been improving although associated with this is a discernible pick-up in global and domestic inflation.

This recent acceleration in price inflation has solidified views regarding the timing and magnitude of interest rate rises.

British interest rates are now at 4.5 per cent and are forecast to peak at 5.5 per cent sometime next year.

In the US the Federal Reserve is expected to begin the process of raising US interest rates at its end-June meeting.

Up to recently the consensus was that the first rise would be only 25 basis points (0.25 of a percentage point).

However, recent strong US inflation reports has led some analysts to forecast a 50 basis point rise in June.

Irrespective of the size of the first upward interest rate move by the Fed, it is now crystal clear that global interest rates will be rising over the next 12 months. The only issue is how high will they go and at what pace.

From the Irish perspective, the European Central Bank (ECB) is likely to move more slowly than other central banks given the relatively slow pace of European growth.

Nevertheless, the ECB has sounded a note of caution regarding inflationary pressures and the next move in euro interest rates will now certainly be in an upward direction.

A regime of somewhat higher interest rates would probably be positive for Irish financials as it may enable them to widen their profit margins.

More important, however, is that the scenario of rising interest rates is occurring because economic growth is so strong.

Expanding loan books and increased sales of savings and investment products should enable financial institutions to grow their profits.

Mortgage lending has been a particularly strong segment for Irish financials for several years and there is no sign of any imminent slowdown.

Recent forecasts released by Euroconstruct contained strong upward revisions to Irish projections.

Volume growth in Irish construction for 2004 was revised from a decline of 4 per cent to growth of 6 per cent.

New homebuilding is a feature with Euroconstruct projecting 76,000 new units in 2004, up from 69,000 new units built in 2003.

Of the quoted Irish financial stocks Irish Life & Permanent is most sensitive to developments in the Irish mortgage market.

The company is due to provide a trading statement on June 23rd ahead of its interim results close period.

Mortgage lending is likely to be enjoying strong growth given the very strong overall market.

The life and pensions side of the business should also be quite buoyant.

Helped by the recovery in the stock market life and pension sales began to pick up in the second half of 2003.

Investors will be watching carefully to see if the recovery continued into the first half of 2004.

On the cost front, IL&P is still benefiting from €29 million of cost savings that are being generated from the integration of TSB.

On the stock market, IL&P is trading broadly in line with its Irish and UK peer group with a price-earnings ratio of just over 10 and a prospective dividend yield of 4.3 per cent.

Given the good fundamentals underpinning its core markets, its shares currently offer exceptionally good investment value.