While global players trail expectations, B of I's half-year results showstrong growth in earnings and dividends

Financial results from banking and insurance stocks have been hitting the news wires regularly in recent weeks. Several of the large global players such as Credit Suisse and Deutsche Bank have published results that were much worse than investors' expectations.

Continental European banks have historically generated much lower profits than British or American banks. Return on equity is a measure commonly used to assess the underlying profitability of a bank. Cross-border differences in accounting practices mean that care needs to be taken when making international comparisons. Nevertheless, it does represent an informative summary measure of profitability.

The return on equity being achieved by large European banks such as Credit Suisse and Deutsche Bank is estimated to be as low as 6.7 per cent and 7.6 per cent respectively for the current year. This compares with the performance of the British and Irish banking sector, where most quoted banks are generating returns on equity exceeding 15 per cent. For example, Barclays Bank has an estimated return on equity of 17 per cent whilst Lloyds TSB's return on equity is well more than 20 per cent.

Indeed, even a bank such as Abbey National that is going through a very bad patch should still achieve a return on equity that exceeds 10 per cent in 2002.

Insurance stocks have also been performing very poorly, mainly due to the declines in the value of their vast equity portfolios. Unlike British banks, British insurers have not been immune to these trends and many companies have seen their capital base shrink to historically low levels.

An extreme example is the plight of Equitable Life that recently announced it was cutting payments to its annuity holders. This was because the company's surplus capital had fallen to about £350 million (€548.5 million) compared with its with-profits fund with a value of £15 billion.

Equitable's problems are largely of its own making due to a mismatch between assets and liabilities on its balance sheet. The decline in equity markets has merely exacerbated this mismatch problem. Against this background of financial instability, the most recent half-year results from Bank of Ireland must come as welcome news to its diverse base of shareholders.

Bank of Ireland delivered strong growth in earnings and dividends over the period.

The bank's return on equity was a healthy 23 per cent which represents the tenth consecutive year in which Bank of Ireland has generated a return on equity exceeding 20 per cent.

These strong results in part reflect the success of the bank in capitalising on the buoyant Irish economy. About 60 per cent of profits are generated in Ireland and almost 50 per cent of the loan book are in low-risk home mortgages.

All of the bank's divisions performed ahead of the relevant market average over the period. The life assurance division grew its headline profits by 27 per cent.

Most of the investment products sold are unit-linked and hence the bank's capital base has only a limited exposure to declining equity markets.

Declining stock markets did lead to a fall of 7 per cent in the profits generated by the asset and wealth management division.

However, this division added an amazing €4 billion of new business to its assets under management so that, as at September 30th, total assets under management were €45 billion.

The performance of this division looks very healthy when put in the context of the decline of about 30 per cent for the fund management industry on a global basis.

Bank of Ireland's British business also did well recording a rise in profits of 14 per cent. Activity in Britain is concentrated on the mortgage market mainly through the Bristol & West subsidiary.

Britain accounted for 25 per cent of profits on a divisional basis. Therefore it is a significant part of the group although it does take on a somewhat greater significance in light of Bank of Ireland's overtures to Abbey National.

It would seem that strategically the bank aspires to grow by acquisition and that the British market is its prime target area. But the British market is very competitive and when acquisition opportunities do come along, they tend to be quite highly priced.

Many investors would probably be happy if the bank's management continued to produce the type of performance that has been generated from organic growth in recent years. While the economic environment in the core Irish market will be much more challenging in the next two to three years, the bank seems well placed to cope with a slower growth scenario.

More modest growth in earnings and dividends is therefore likely but the bank seems well capable of meeting shareholders' realistic expectations.