Following a long period of under-performance the Irish equity market has managed to regain some lost ground in recent months.

The ISEQ index is now up over 10 per cent so far this year, compared with substantial declines in several of the major international stock market indices.

Whilst the stellar performance from Elan is a major contributory factor in the Irish market's renaissance, a strong recovery in banking stocks in recent weeks has further underpinned the Irish markets relative strength.

Although worries about overheating in the Irish economy remain, it does seem as if overseas investors finally took the view that such risks had been fully priced into share prices and began to reinvest in Irish financial stocks.

The upshot of this has been a recovery in share prices that has been led by Irish Life & Permanent, which has risen by 35 per cent in the past three months.

The share prices of AIB and Bank of Ireland have followed, with rises of 25 per cent and 16 per cent respectively.

Despite these strong gains, analysis of the data in the accompanying table highlights that Irish financial stocks are still attractively priced compared with their international peers. The two main Irish banks are currently trading on a price-earnings ratio of around 10, compared with Royal Bank of Scotland, which is on a multiple of 15 times earnings.

However, once the Royal Bank of Scotland completes integration with the recently acquired NatWest Bank, its profitability should rise considerably and consequently its price-earnings ratio should decline.

The other UK and European banks shown in the table are on higher price-earning ratios than the Irish banks, although the gap is now quite narrow. When a comparison of dividend yields is made, the valuation argument in favour of Irish banks is not quite so clear-cut. Both AIB and Bank of Ireland now yield just under 3 per cent, whereas several UK and European banks offer dividend yields in excess of 3 per cent. The overall impression created by this data is that the recent run in Irish financial shares can be primarily viewed as reflecting a return to more normal valuation levels.

However, now those share prices have risen, the question on many investors' minds will be whether further share price gains are in prospect. In part this will depend on developments in overall market conditions that are impossible to predict. The current high level of stock market volatility and the apparent bursting of the technology bubble seem set to continue, at least in the short term.

This is probably beneficial for financial stocks, since they would be viewed by many investors as a relatively safe haven in turbulent times. Despite fears of a Middle East war and rising oil prices, world economic growth remains robust, thus providing a favourable economic backdrop for financial businesses. During the recent recovery in the share prices of Irish financials, negative factors such as increased competition and the associated dangers posed by new technology seem to have taken a backseat.

Nevertheless, the underlying pressures of intensified competition and the trend towards lower profit margins remain. In the UK, this has recently been highlighted by Halifax's announcement that it plans to offer current accounts with a rate of interest of 4 per cent.

While such a move in the Irish market does not seem to be imminent, it is probably only a matter of time before a similar development occurs here. The wider application of the Internet and associated mobile technologies to the provision of financial services will lead to long-term downward pressures on profit margins.

Although increased efficiencies and greater volumes will serve to preserve profits, the overall environment seems set to remain extremely competitive.