In the past few months, media analysis of stock-market movements has been dominated by developments in Asia. The doom and gloom merchants have had something of a field day given the ongoing crisis afflicting much of the region. Fears that the Asia slowdown will impact on Europe and the US by damaging corporate profits has been well documented.
In the middle of this, the performance of AIB, as revealed in its results for the first half of 1998, highlighted just how strong profits are growing in many Irish companies. The financial performance of AIB benefited from a number of factors, the three most important being:
the strength of the Irish economy;
virtually no Far Eastern exposure;
US operations were strong reflecting favourable trends in the US financial sector.
A comparison with the results from the quoted British banking sector highlights just how good AIB's results were (see table).
AIB's 1998 first-half pre-tax profits rose by 66 per cent compared with the same period in 1997. For the full year, AIB's profits are forecast to grow to more than £800 million which is a rise of just under 40 per cent. These results and future prospects stand in sharp contrast to AIB's peer group which can be broken down into three categories: mortgage banks, Asian banks and British clearing banks.
After an initial strong run, the recently mutualised building societies in Britain are facing very difficult market conditions. Their margins are being squeezed as a result of fierce competition from the remaining mutual building societies. Diversifying into other product lines is the strategy being pursued by the mortgage banks, but this is a slow and often expensive process. In addition to ongoing pressure on margins, the British housing market has begun to slow down which will adversely affect profit growth.
HSBC and Standard Chartered Bank are two banks which originated in the Far East. Not surprisingly, both banks are suffering from the current malaise in Asian economies. Pre-tax profits declined at both banks in the first half of the year as non-performing loans rose. The immediate outlook is for further sharp rises in provisions for bad debts so that a resumption of profit growth is a long way down the road at both of these banks.
The performance from the British clearing banks remains quite good where returns on equity have been rising strongly in recent years. Given the expected slowdown in the British economy over the next 12 months, the rate of profit growth is forecast to decelerate at the British clearing banks.
In contrast to this group of banks, AIB looks set to continue to fire on all cylinders for the foreseeable future. AIB Bank, which encompasses branch banking in the Republic of Ireland and Britain, remains the mainstay of the group. With the Irish economy continuing to grow strongly, rapid loan growth in Ireland will result in further growth in profits.
In the US, the acquisition of Dauphin Deposits has increased AIB's scale in the US which now accounts for 30 per cent of profits. Underlying loan growth of 7 per cent to 8 per cent combined with cost savings should result in healthy growth in profits.
AIB's capital markets division which includes Treasury, Stockbroking and Fund Management is likely to be somewhat mixed but this division only accounts for slightly more than 10 per cent of pre-tax profits. Finally, AIB's venture into Eastern Europe through its Polish subsidiary, WBK, looks to be a winner. For 1998, WBK's profits are forecast to be close to a respectable £50 million and could grow very strongly over the medium term.
Over the years many private investors have favoured investing in bank stocks and certainly a policy of continuing to invest in AIB should continue to reap handsome rewards.
