Serious Money: One way or another, most of us own bank shares. Personal or company pension schemes always invest in banks, as do unitised or mutual fund-type products.

That's because financial institutions - mostly banks, but also insurance companies - make up such a large proportion of most stock market indices. It is a very brave - and very rare - fund manager who does not have a bank in his portfolio.

In Europe, for example, nearly one quarter of the FTSE EuroFirst index of the top 300 shares is comprised of banks of one kind or another. When we add insurers we find that nearly 30 per cent of the market is accounted for by financial stocks of one kind or another.

Anyone interested in the stock market has to have a view on banks and investors hoping for a market recovery from recent turbulence would do well to cheer the banks on. History teaches us that bull markets rarely occur without the participation of the banks. When you are that significant, everyone is keen to see you do well.

Banks provide an almost perfect metaphor for the market. They tend to track the overall market very closely and, in terms of the way in which we can think about individual companies, a bank represents a typical analytical problem. The investor can either be intimidated by the complexities of the overall business or reduce the analysis down to the key drivers of profits.

Despite what their managers tell us, banks are relatively straightforward to analyse. The "top line" for a bank can be split into two broad categories. First, there is the traditional source of income, the revenues that come from lending other people's money. Banks make profits by lending money at rates higher than they have to pay for borrowing. Every deposit that the public makes is a loan to the bank which is immediately loaned on to somebody else.

The bank's gross profit is the money it makes on the difference between what it pays its depositors and what it receives from its borrowers.

It does not take much financial acumen to work out that banks are incentivised to be utterly ruthless in paying their depositors as little as possible and charging lenders as much as the market can take.

Banks have typically tried to diversify away from this traditional revenue stream and now typically have large "non-interest income" streams. These can be the fees levied on depositors, credit card revenues, trading profits from investment banking divisions and revenues from writing insurance policies.

A growing part of this revenue stream is often to be found in asset management divisions. In Europe, the big asset managers tend to be oriented as much towards private wealth as to institutional money.

Net interest income is simply the product of the amount of loans the bank makes and the net interest margin. Hence, banks are often seen as a play on the economy: lending volumes tend to be strong when the economy is growing vigorously and vice versa.

In the UK and Ireland, one of the few obvious manifestations of competition in banking is to be found in the downward trend in net interest margins over the last decade or so. Nevertheless, returns from mainstream banking on these islands have been fabulous. One key accounting measure for banks is return on equity, or ROE. The next time a banker complains about competition, ask him how ROE levels in the 20-30 per cent range can be consistent with a competitive business.

Whether a bank is a buy or a sell depends on what happens to its ROE in the future. Analysts like to over-complicate things by inventing different return measures but if we can get a decent handle on ROE we are most of the way there.

Many analysts think the main Irish banks are cheap because they see ROEs above 20 per cent and price-earnings ratios heading for single digits. Some investors worry about Irish banks because they are seen as leveraged plays on a much hyped property market. During real estate busts, bank profits growth doesn't just slow down, they sometimes go into loss. In extreme cases, the capital base of a bank can be significantly damaged (banks are essentially inverted pyramids, with all of the myriad activities based on a narrow foundation of the actual shareholders' capital invested in the business).

So, domestically at least, it comes down to two "simple" questions. First, is the Irish property market likely to implode? Second, what will more competition do to margins?

Actually, there is a third question: what do you think of equities right now? Taking this last question first, anyone still bearish should logically avoid banks as much as they avoid stocks generally.

Anyone with even a mildly optimistic view of the Irish property market should be positive about Irish banks. But markets - being the fickle creatures that they are - will fret about property and what it might do to bank earnings for a long time to come.

The UK provides us with a good example here: the slowing property market of 2004-05 held back the performance of bank shares and even when the housing market stubbornly refused to crash, investors remained worried. To a certain extent, they still are.

The UK provides an example of how an economic slowdown can generate nasty surprises: a relatively mild rise in interest rates didn't prompt a property crash or lots of duff loans for the banks but it did create lots of problems in the areas of credit card and overdraft lending. People have kept up their mortgage repayments to the banks but fallen behind - or even defaulted - on their credit cards. This is something to watch out for in Ireland as the European Central Bank turns the monetary screws.

Competition is undoubtedly getting more intense but at a pretty glacial pace. The domestic banks remain very strongly placed - I wouldn't get too worried just yet.

So, on any kind of optimistic spin of the future, Irish banks look pretty cheap.

But the experience of UK banks teaches us that they could stay looking cheap for some time to come. Bank shares are not for those looking for a quick profit from here: the banking environment may have to see a complete cyclical downswing before investors return.

So Irish bank shares will probably get even cheaper. But at some point during that cycle, Serious Money will start buying.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.