Croesus/An Investor's View:M&T Bank, in which AIB has a 24 per cent stake, reported first-quarter profits on Tuesday.

On April 2nd, the bank had issued a profit warning after it received subdued interest on some mortgages that it tried to sell. This was caused by the well-publicised problems in the sub-prime residential mortgage market, which had a negative impact on the sale value of the banks alternative (Alt-A) residential mortgage loans on the secondary market.

At the time of the warning, M&T estimated profit at $1.50-$1.60 per share, which was about 18 per cent below analysts' expectations at the time. Ultimately, net income came in at $176 million equivalent to $1.57 per share, compared with $1.77 a year earlier.

On Tuesday, the share price rose reflecting the fact that the bad news had already been priced in - the shares are down by approximately 10 per cent this year. In its post-results conference call, M&T reiterated that the outlook for growth in fee income, expenses and credit quality remains unchanged.

While no specific guidance was provided, it seems likely that full year earnings per share (EPS) will at least match the $7.37 earned in 2007.

The negative impact on AIB's share price has been negligible which is not too surprising given that M&T contributes only about 7 per cent of AIB profits..

For AIB, and all of the Irish financials, it is developments in their core retail and corporate banking divisions that will continue to be the key driver of share price performance.

Over the past month, the larger Irish banks have significantly underperformed the wider European sector. This underperformance would seem to be due to negative investor sentiment. Investment analysts are likely to find that they will have to revise down their estimates of the profits generated from Irish residential mortgages. However, for AIB and Bank of Ireland, profits generated from corporate banking are much larger. Both banks have significant UK mortgage books.

Of the two, Bank of Ireland is more active in the UK market and UK mortgages now account for 31 per cent of its overall loan book. Specialist mortgages such as buy-to-let and self-certified mortgages account for 46 per cent of the bank's overall UK mortgage book. Asset quality remains strong with only 0.2 per cent of the book in arrears of greater than six months as at 30th September 2006.

Despite some worries about sub-prime mortgages, the core British mortgage market, including buy-to-let, continues to be strong.

In contrast to the Irish residential property market, Irish commercial property continues to go from strength to strength. CBRE's first-quarter 2007 review of the Dublin office market highlights a pick-up in activity since Christmas. Take-up was up 31 per cent (year-on-year) to 56,000sq m, the highest level of take-up in six years. The overall vacancy rate in the Dublin office market declined to 10.6 per cent from 11.1 per cent in first quarter 2006. Strong tenant demand is feeding through to higher rents.

In general, business lending growth rates have been quite good in the opening months of 2007, and analysts may find that an improved profit contribution here could offset any negative impact from slower growth in residential mortgages.

Furthermore, profit margins on business lending tend to be higher than on residential mortgages. Therefore, while some segments of the Irish banks' activities may underperform expectations this year, others may outperform. As a result, it is still likely that both banks can meet current profit forecasts of EPS growth in the 10 per cent - 13 per cent range.

If this is the case, the recent relative under-performance of Irish bank shares could present a buying opportunity. The Irish banks look good value compared with European peers. Bank of Ireland and AIB are both trading on price/earnings (p/e)ratios of about 10 for 2007, which compares with the average of just over 13 for the European bank sector.

Dividend yield comparisons also show the Irish banks in a favourable light. AIB and Irish Life & Permanent offer yields just above the European average of 3.5 per cent, while Bank of Ireland's 4.4 per cent yield is well above this average.

Results from Bank of Ireland and Anglo Irish next month could act as the catalyst for a modest re-rating of Irish banks.