Shares of the two main Irish banks continued to come under sustained selling pressure on the Dublin and London markets and dealers said that there is still no sign that the banks have touched bottom. AIB closed down 22 cents on €9.28 while Bank of Ireland was 18 cents weaker on €6.80.
At these closing levels, which are the lowest both banks have traded in two years, AIB shares have now fallen 17 per cent since the turn of the year, while Bank of Ireland is down 13 per cent. The extraordinary collapse in the value of AIB shares has meant that the bank has forfeited its number one position in the Irish market to Eircom.
The slump in the bank shares which began in the middle of 1999 has meant that AIB is now trading at little more than half its record high of €18.15 of mid-1999, while Bank of Ireland is down one-third on its €10.50 high of last year. Most Irish brokers believe that at these levels, both banks are worth buying. But they also believe that any serious interest in the bank stocks is unlikely to be triggered until various uncertainties that have weighed on the shares are clarified.
At these levels, both bank stocks are trading on 2000 earnings multiples of eight or nine, compared with the European banking average of 14 and the 12/13 p/e multiples enjoyed by the British banks.
"That's the biggest discount I've seen for quite a while," commented ABN-AMRO analyst Mr Eamonn Hughes.
Mr Hughes has Bank of Ireland on his "buy" list and AIB as a "hold" but believes that there are a number of fundamental issues that must be sorted out before bank shares rebound from their current weakness.
Fear of interest rate rises is one factor that usually weighs heavily and until it becomes clear what the US Federal Reserves intends to do, then uncertainty will depress bank stocks worldwide.
Most analysts believe that the Fed will increase US rates by at least a quarter of a percentage point and possibly a full half point at its next policy-making meeting next week, while there are continuing fears that British interest rates are also going to rise. Already, expected rate rises by the European Central Bank.
Bank of Ireland, in particular, has a heavy exposure to the British mortgage market and the current banks' reporting season - beginning today with Northern Rock - should give some indication of the influence on margins in British mortgage lending, said Mr Hughes.
He said that fears of an Irish economic bubble continue to preoccupy many overseas investors and that last week's inflation figure has not helped in this regard. "It's not very easy getting it across to overseas investors that the inflation figure is down to an increase in the price of cigarettes," he commented.
NCB analyst Mr John Kelly, in a detailed analysis of the banks this week, adopted much the same view and warned: "The Irish bank sector is likely to continue to struggle in the immediate future, for a variety of reasons."
These reasons include the longer term impact of the Internet on banking returns and the threat of increased competition for overseas entrants to the Irish market.
"This is compounded by economic fears such as the impact of rising interest rates and bond yields," he said, adding that worries over Irish economic overheating "will also remain a concern to some investors although we believe that this is largely a misplaced view". Mr Kelly suggests that "buying on the dip looks like a relatively good bet" but warns that ultimately both Irish banks will need to make big moves if they wish to become long-term winners.
