Now more than ever, how well the Irish economy fares will determine the performance of the quoted financial sector

Historical analysis of seasonal patterns in share price movements shows that September has been the worst month of the year in terms of equity market performances. So far, September 2002 is acting within the historical norm and if current equity trends persist, it could well end up being one of the worst Septembers for many years.

Although investors in the Irish equity market have suffered over the past year, the extent of capital losses has been ameliorated by the performance of the Irish financial stocks. Just how good this performance has been can be gleaned from the accompanying table.

Over the past 12 months all of the main Irish financial stocks have produced positive price performances. The two large banking stocks are both up by a very respectable mid-teen percentage gain. Bank of Ireland's rise of 16.7 per cent is just marginally ahead of AIB's 15.1 per cent return but, in light of the huge losses incurred by AIB due to the Rusnak affair, its share price rise is truly impressive.

Irish Life & Permanent (IL&P) did not do quite as well, with a positive return of just 5.3 per cent. The reason for this possibly relates to IL&P's exposure to insurance-related businesses. However, IL&P has performed very well relative to other European insurers.

However, investor accolades must go to the two smaller quoted financial stocks. Anglo Irish Bank is the top-performing Irish stock over the past 12 months with a share price rise of 78.4 per cent. The next best slot is filled by First Active with a rise of 69.6 per cent over the past year.

In any circumstances these would rank as superb returns. However, the performance of these shares is even more impressive in the context of the sharp share price declines experienced by the vast majority of quoted companies over the past year.

For all the Irish financials, a key factor in these strong returns has been the continued robust growth of the Irish economy. Despite some slowdown in the overall economy, bank lending has continued to grow rapidly.

In particular, mortgage advances have maintained a very rapid pace of expansion. In addition, because the economy has continued to move forward, the incidence of bad debts has remained low.

These favourable macro factors probably explain the solid performance of the larger banks.

The super-normal returns from Anglo Irish and First Active would seem to be due to two factors specific to those companies. Firstly, the respective managements have succeeded in improving the overall efficiency of both banks dramatically in recent years. Secondly, the almost exclusive focus on the fast-growing Irish economy has paid off handsomely.

In First Active's case, it is the rapidly expanding residential mortgage market that lies at the heart of its business. In contrast Anglo Irish has a leading role in lending to the small-business sector, which has boomed during the Celtic Tiger era.

Having rewarded shareholders so well over the past year, it will clearly be very difficult to produce a repeat performance over the next 12 months. This seems particularly true with regard to Anglo Irish Bank, where the dividend yield has fallen to only 1.7 per cent due to the sharp rise in its share price. The dividend yields offered by the other financials range from 2.9 per cent (Bank of Ireland) to 3.5 per cent (AIB).

Compared with low deposit rates these are reasonably attractive yields but are a little lower than those on offer from many quoted British and continental European financial stocks. For example, HBOS in Britain, which is the merger of Halifax and Bank of Scotland, provides a yield of 4 per cent and France's BNP Paribas offers its investors a yield of 4.2 per cent.

However, if one assesses the Irish banks on the basis of price/ earnings ratios (PER), they still appear to offer very good value. First Active is now trading on a PER of 11.7, which is the highest of the Irish financials.

AIB now trades on a PER of 10 whilst Bank of Ireland's shares trade on a slightly higher PER of 10.6. This compares with a PER of 11.5 for HBOS and a somewhat lower PER of 8.5 for BNP Paribas.

On balance, the Irish banks and insurance companies still appear to offer good value relative to their international peers.

However, the chance of further strong out-performance does now seem quite low. This seems particularly true for First Active and Anglo Irish given the relatively low-dividend yields now on offer from these two shares.

Furthermore, these two companies are particularly vulnerable to any significant faltering in the performance of the Irish economy. More than ever, how well the Irish economy fares in the current turbulent climate will be the main determinant of the investment performance of the quoted Irish financial sector.