Investor: In the US market most large companies have reported their second-quarter earnings figures. Results have generally exceeded expectations and this has given an important fillip to the US equity market.
On this side of the Atlantic, companies report results twice a year - interim and final results. British and Irish companies with a December year-end are now reporting their interim results and the past week, in particular, has been a very busy one for financial stocks, including results from AIB.
The financial performance of the British banking sector is always of more than passing interest to both Irish investors and corporations. Many Irish private investors that have diversified internationally will have invested in one or more of the large British bank stocks.
From a corporate perspective, all of the quoted Irish financial stocks have some operations in the UK. This is particularly so for Bank of Ireland through its Bristol & West mortgage bank.
In addition, in the past Bank of Ireland has made some high-profile attempts to expand aggressively in the UK with overtures to Alliance & Leicester and subsequently Abbey National. More recently, Bank of Ireland management has stated that the bank intends to concentrate on growing organically in Britain.
Alliance & Leicester was one of the first of the British quoted banks to report interims and its results pleased the market. Pre-tax profit for the half-year to June 30th rose from £233 million sterling (€329 million) to £262 million and accompanying the results was an announcement that the company is to embark on a further share buyback programme of up to £150 million.
Much of this growth in profits came from unsecured lending, where gross advances rose 47 per cent to £1.1 billion. However, in the mortgage market Alliance & Leicester has been adopting a much more cautious stance, taking only a 1.2 per cent share of net new lending, which is well below its traditional share of 3.4 per cent.
Mr Richard Pym, chief executive, said Alliance & Leicester had deliberately avoided riskier sectors such as buy-to-let and had also reined back on mortgage lending in London and the South-East.
In a number of respects, this strategy contrasts with the strategy adopted by Bank of Ireland's Bristol & West subsidiary, which has been expanding aggressively into the buy-to-let sector of the mortgage market.
Northern Rock, another British mortgage bank, which has deposit-taking activities in the Irish market, also reported a strong set of interim results. Its first-half pre-tax profit rose from £153 million sterling to £186 million, a rise of 22 per cent.
Unlike Alliance & Leicester, Northern Rock took an aggressive approach to growing its mortgage book and it benefited from a large increase in the level of remortgage activity.
In general, it does seem that the quoted British banking sector has been performing reasonably well over recent months. This has been reflected in quite good share price performances as can be seen from the accompanying table. Abbey National, Barclays and Lloyds TSB have enjoyed rises in their share prices of over 10 per cent in the past three months.
In contrast, with the exception of Anglo Irish Bank and First Active, the share price performances of the quoted Irish stocks have been lacklustre. Over the past three months, the share prices of AIB, Bank of Ireland and Irish Life & Permanent have declined by 7.1 per cent, 6.3 per cent and 4.3 cent respectively.
This comparison with the British bank sector is consistent with other data showing that the Irish bank sector has modestly under-performed the broad European banking sector so far this year. It is difficult to identify a single cause for this recent relative under-performance. The slowdown in the rate of growth in the Irish economy is a contributory factor but all European economies have been slowing this year.
The two larger Irish banks, AIB and Bank of Ireland, have been actively repurchasing their own shares in the market reflecting the fact that their capital ratios are well above the minimum requirements set by international regulators.
In terms of valuation, as measured by price-earnings ratios and dividend yields, the Irish banks are by no means expensive and, if anything, at current share prices they look cheap relative to many of their international peers.
Given the lack of any obvious negative fundamental factors, it may well be that the Irish banks will soon play catch-up with the European sector resulting in a period of out-performance in the near future.
