Headed by Eugene Sheehy, the bank operates in five countries. It offers full banking services in the republic and in Northern Ireland, where it operates as First Trust. The group also has a business banking arm in Britain, a 23% stake in the American regional bank M&T, and a controlling stake in Bank Zachodni WBK in Poland.
In addition, AIB owns 25% of Ark Life, a life and pensions group in Ireland that is majority-owned by Aviva, a global insurer.
It also owns Goodbody Stockbrokers, Ireland’s second-biggest stockbroker.
On August 1, AIB reported pre-tax profits of €1.2 billion for the six months to the end of June. Earnings per share were up 29% on the same period of 2005. Its total operating income increased to just more than €2 billion.
The experts below have been chosen for their skills in a number of investment areas. They, or the funds they manage, may hold shares in the companies or sectors discussed.
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Kevin McConnell, head of research, Bloxham Stockbrokers
AIB released a strong set of half-year results, well ahead of expectations and reflective of “buoyant, well-spread growth” across the group’s operations. Having effectively used its Irish business as its engine for growth during the leaner years, AIB is now benefiting from strong international and capital markets’ performance to drive an incredible 29% growth in earnings in the first six months.
This ranks AIB right at the top end of performance among its European banking peer group, and sends a clear message to investors that the growth story is far from over.
Along with the excellent results, AIB management now expects 2006 earnings per share to rise by more than 20% this year, compared with the “mid-to-high teens” growth indicated previously.
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Given that AIB had already upped forecasts in its pre-close statement in May from an expectation of “double-digit” growth, the group is firmly showing strong upward momentum in forecasts, helping to drive the stock back to February’s historic highs.
The difference is that AIB is set to produce earnings growth at least 7% ahead of the expectations in February.
While there is little doubt AIB’s Irish operation is riding the wave of a boom in the domestic economy, driving a 19% increase in first-half profits here, it is the performance of the overseas exposures in the UK, Poland and America that sets the bank apart.
The operations in Britain and Northern Ireland produced an 18% increase in its bottom line in a market where larger UK peers struggle to produce double-digit profit growth. Poland landed a 62% profits increase, while the stake in America’s M&T also performed well.
Throw in the huge 58% profit increase in capital markets and AIB’s Irish operations are well supported.
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In spite of its run to more than €20, pushing 2007 price/earnings ratio to more than 10 times, AIB trades at a marginal discount to the UK and at 12% discount to the European sector on next year’s forecasts.
While earnings momentum will ease into 2007, there is room for earnings upgrades, which should deliver a further long-term upside for investors. Short term, the stock is likely to trade more in line with a volatile market after a strong recent out-performance.
Judgment: buy below €20
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Stuart Draper, head of equity research, Dolmen Stockbrokers
AIB’s recent interim results exceeded market expectations, with the result that we upgraded both our 2006 and 2007 earnings forecasts.
The bank’s first-half 2006 results showed its pre-tax profit and earnings per share both rising by 29% year-on-year to €1.1 billion and 93.7c respectively. This was 7% better than consensus forecasts.
Even though most of the positive surprise was generated by some exceptional recoveries of previously written-off loans, even excluding this effect, the bank’s operating profit before bad debts was 3% better than expected.
The operating profit growth achieved by AIB’s capital markets and Polish divisions were particularly impressive, at 26% and 62% respectively.
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In addition to more robust than expected credit quality, the bank’s net interest margin of 2.29% was more resilient than the 2.2% expected, resulting in the strong group loan growth of 24% translating into a 29% increase in earnings.
Despite this strong loan growth resulting in an increased reliance on funding from the wholesale money markets and an increased portion of lower-margin mortgage lending, AIB is still expecting 2006 margin erosion to be no greater than 0.2%.
The recent first-half results also showed that the bank’s bad debt charge and margin erosion for 2006 and 2007 should be comfortably maintained in line with current consensus forecasts, leaving the way open for continued stronger than expected loan growth to deliver outperforming earnings growth.
We upgraded our AIB recommendation from neutral to buy on May 16 at a share price of €17.99, with a 12-month price target of €20.50. This was based on 12 times 2006 earnings per share of €1.71.
Following the bank’s stronger than expected first-half results and its raised guidance for 2006 earnings of “over 20%”, we upgraded our 12-month price target to €21.50 on August 2. This is based on 12 times 2006 earnings per share of €1.78.
AIB dividend will yield about 3.5%, a significant additional comfort to investors who can expect the share price to rise.
The healthy dividend adds a sufficient further return to justify reiterating our buy recommendation at current levels.
Judgment: buy
FIRM AT A GLANCE
Share price: €20.20
Market cap: €17.7 billion
Year end: Dec 06
EPS forecast: 176c
Dividend forecast: 72c
Leading shareholders: BIAM 5.7%, Capital Group 5%, Fidelity Investments 5%, AIB plc and its subsidaries 4.7%, Franklin Templeton 3%