INVESTOR: The Irish economy is still by far the dominant generator ofprofits for Irish banks, so pay close attention to its progressCompared with itsinternational peers, the Irish banking sector offers verygood value, trading on a price-earnings ratio of only 11.2 and a netdividend yield of 3.2 per cent

In turbulent market conditions cautious investors will generally focus on the more secure sectors of the stock market - such as financial stocks.

Amidst the extreme volatility of the past 18 months, banking and insurance stocks have generally provided stable if somewhat modest returns.

The September 11th tragedy was a negative shock for the insurance sector but the inherent strength of the sector was evident.

Once insurance companies announced the extent of likely claims, their share prices promptly recovered.

The banking sector has also comfortably weathered the recent economic storm clouds.

Fears that the economic slowdown would lead to sharp increases in bad debts have simply not been realised.

There is now a growing consensus that economic recovery is beginning to get a foothold in the all-important US economy.

This is clearly a very positive development for the Irish economy, which seems to have followed the US downturn with a lag of about six months.

If this pattern is repeated, a spring US recovery would start to be felt in the Irish economy towards year-end.

If this more optimistic view of economic prospects proves to be correct, the US recession will have been short and shallow.

Whilst the odds favour 2002 to be a year of economic recovery, there are many reasons for believing that the pace of any global economic recovery will be slow and faltering.

Corporate and personal levels of debt, particularly in the US economy, are very high. High levels of consumer debt and an extremely low personal savings ratio is the price that the US economy has paid in order to sustain high levels of consumer demand.

It is this strength in consumer spending that has prevented the US economy from sliding into outright recession.

At some point, Americans will have to start rebuilding their savings and this will limit the magnitude of the prospective recovery.

This prospective economic environment of moderate growth and very low price inflation could prove to be very favourable for banking and insurance stocks.

If policymakers and central bankers take the view that economic recovery will be tentative, then they will engineer a prolonged period of low interest rates.

In this environment, the incidence of bad debts would be low and banks' profit margins could be improved through cost-containment.

Therefore, the quality of banks' underlying profitability should be improving progressively as we move through 2002.

In a low-growth environment investors may also be inclined to focus more on lower-risk stocks such as the banks and insurers. Technology and other high-growth stocks are still highly rated.

If growth is likely to be moderate in coming years, investors may not be prepared to pay such a high premium for growth. Bank stocks remain reasonably valued in most markets.

The prospective 2002 price-earnings ratio (PER) for British and European bank sectors is just over 12, whilst the US bank sector PER is a little higher at 13.4.

Dividend yields range from a low of 2.7 per cent in the US to 3.4 per cent for Britain's bank sector.

Compared with their international peers, Irish banks offer very good value, trading on a PER of only 11.2 and a net dividend yield of 3.2 per cent.

Furthermore, there is an unusually wide divergence of opinion regarding 2002 growth forecasts for the Irish economy.

The most pessimistic forecast is for growth to average around 2 per cent, whereas the optimists go as high as 7 per cent.

If the optimists are correct and Irish economic growth averages 5 per cent or more in 2002, then this would be very positive for the Irish bank sector.

Faster economic growth would mean that profit forecasts for 2002/3 would be exceeded.

The Irish economy is still by far the dominant generator of profits for all of the Irish banks. Therefore, investors would be well advised to pay close attention to this evolving economic debate. If evidence comes through that supports the optimists' viewpoint, then a subsequent rally in the share prices of Irish bank stocks would be highly likely.