The high-profile court case between DCC and Fyffes has been grabbing a lot of media attention as a wider audience gets an insight into the entrails of corporate Ireland.

In the meantime, there has been a steady flow of news emanating from the financial sector. AIB, which is the sector's largest stock, has featured regularly in recent months as a number of reports concerning overcharging of customers have been released by the Irish Financial Services Regulatory Authority.

AIB has made a total provision of €50 million to cover reimbursement of customers and associated costs.

Despite intense media focus, the bank seems to have effectively weathered this latest media storm and any negative business impact appears to have been well contained.

In fact, AIB's share price has risen by approximately 10 per cent over the past three months and has out-performed the ISEQ and the European bank sector.

AIB recently issued a trading update, which highlighted how well the company's underlying business is doing. Earnings at the bank are expected to continue to grow at an underlying rate of 10 per cent per annum.

All areas of the business are performing well, although the Irish operations continue to be the main engine of growth. Volume growth is currently very strong in the Republic, with loans growing by 25 per cent.

Growth in the UK is not far behind at 20 per cent plus, whilst corporate lending is also buoyant.

There is a small sting in the tail of this rapid loan growth in the form of lower profit margins. For 2004, AIB is guiding a decline of 33 basis points in its net interest margin to 2.37 per cent.

Greater competition is partly to blame but most of the decline is due to loan growth outstripping the growth in retail deposits. As a result, the share of funding from the more expensive wholesale market has increased. However, the rapid pace of growth is not expected to lead to a large rise in costs, which are forecast to rise by 5 per cent in 2004.

Outside of the UK and Ireland, AIB's principal business activities encompass M&T Bank in the US and BZW Bank in Poland.

AIB owns 22.5 per cent of M&T, which is worth €2.1 billion at current market prices. AIB's 70 per cent stake in its Polish subsidiary is valued at approximately €1.1 billion.

The Polish bank has not yet delivered adequate returns although the long-term potential could be considerable if the Polish economy succeeds in even partially catching up with western Europe.

AIB's franchise in Poland provides it with a circa 20 per cent share of the regional market in western and south-western Poland.

In the US, M&T Bank has been performing exceptionally well and this has been reflected in a buoyant share price. M&T is a strong regional bank with good growth prospects and should continue to boost AIB's profits for the foreseeable future.

However, there is a question mark over the long-term strategy regarding this holding. This issue could come to a head if M&T bank decided to make a large acquisition funded through the issue of new shares. In this scenario, AIB would have to contribute fresh capital to the business if it wished to avoid dilution of its holding.

Shareholders would be bound to raise serious questions about the wisdom of committing more capital to a company where AIB does not have a controlling interest.

In such a scenario one solution would be for AIB to simply distribute its M&T stake on a pro-rata basis to its shareholders, who could then make up their own minds regarding fresh investment in M&T. Also, such a move would unlock hidden value given that the AIB share price probably does not incorporate the full market value of its shareholding in M&T.

AIB is currently capitalised at just under €13 billion and is trading at a prospective 2005 price/earnings ratio of 10.5 and a prospective dividend yield of 4.4 per cent. Compared with the Irish 10-year bond yield of 3.5 per cent, the dividend yield in particular should act to provide strong support to the shares.

Future dividend growth should also be healthy given that the prospects for earnings growth over the medium term are very good.

The bank's strong market position should enable it to cope with intensifying competitive pressures in its core Irish market. Consequently, any erosion in profit margins is unlikely to be sufficiently large to negate AIB's positive business outlook and, therefore, Investor rates the shares as a very solid medium-term buy.