Bank of Ireland could overtake AIB in the race for inclusion in the prestigious Eurostoxx 50 index once an error in calculating its value is rectified.  Jane O'Sullivan, Markets Correspondent, reports.

Stoxx, the Dow Jones company that operates the index, has undervalued the bank by 6 per cent when determining its market capitalisation due to confusion surrounding its freefloat.

Bank of Ireland, along with rival AIB, is tipped for inclusion in the index when it is reviewed next month.

A place on the index, the second-largest index tracked globally after the Dow Jones Industrial Average in the US, tends to boost investor demand and drive share prices higher.

While there has been a feeling in the market that only one of the Irish banks will make the list in September, some analysts believe that both banks could gain inclusion on the index.

Mr Seamus Murphy, banking analyst with Merrion Stockbrokers, points out that there is no country bias to the index and, provided both banks boast rankings above 40th place at the end of August, they should gain automatic entrance.

Their strong performance since the start of the month, which has seen them outperform their European rivals, has left both banks poised for entry to the Eurostoxx 50, which includes blue-chip stocks like Deutsche Bank and Nokia.

Earlier this week, AIB ranked 39th on the Eurostoxx 50 with Bank of Ireland a few places behind in 42nd place.

However, if Bank of Ireland's market capitalisation is adjusted to account for the undervaluation, it would take over the 39th spot from AIB, pushing the latter into 40th place.

A spokeswoman for Stoxx said the problem with Bank of Ireland arose because the 6 per cent stake held by the bank's asset management subsidiary, BIAM, had been excluded as it had been viewed as not readily tradeable.

It would be adjusted in next month's review, she said.

Other stocks competing for an index place from September 23rd include German car maker BMW and French construction group Lafarge.

Meanwhile, in a note on Irish financial stocks, Merrion's Mr Murphy suggests investors should reduce their weightings in AIB and Bank of Ireland once the Eurostoxx-motivated buying has unwound.

He advises switching into Irish Life & Permanent and Anglo Irish Bank, which he describes as "offering compelling value".

AIB's share price closed at €14 yesterday and Bank of Ireland finished trading at €12.50.