Broker says top banks are undervalued

Bank of Ireland and AIB shares look oversold and undervalued, according to the latest strategy and stock outlook from NCB Stockbrokers.

It says that the recent scandals that have hit the two major banks are an indication of an improved regulatory environment.

The outlook estimates that Irish GDP growth for 2004 will be in the region of 5 per cent, with ongoing growth potential in the region of 5-6 per cent per annum into the medium term.

"Demographics will continue to be the core driver of relatively high potential economic growth in Ireland," according to the outlook.

It says Irish financial stocks have had a tough time recently with investors worrying about margin attrition and "recent disclosures about a number of compliance matters". However, the stockbroker says it sees the glass as being "half-full rather than half-empty" in this regard.

"We see the recent travails of the two leading Irish banks as being a reflection of a new environment of increased stringency and greater disclosure on matters of compliance and regulation.

"Investors have had a demonstration that the Irish banking system is being actively regulated from within and without and, ultimately, this will be associated with perceptions of reduced risk rather than higher risk relative to other banking systems."

The stockbroker says it sees AIB and Bank of Ireland as undervalued on an average multiple of just over nine times expected earnings in the current year and prospective dividend yield of 4.5 per cent.

Food stocks with credible growth profiles are likely to be more sought after, according to the firm, which mentions Kerry and IAWS, Fyffes and C&C group.

Elan is described as having a significant potential to outperform the market as earnings start to flow from Antegren.

"Ryanair has been a significant disappointment this year with a price war among low-cost providers adversely impacting yields, as the company emerges from a period of rapid expansion. We continue to believe that Ryanair has the market dominance and lowest-cost business model, to ultimately prevail in a still fast-growing industry."

It notes that Tullow is now the largest independent oil and gas exploration and production company quoted on the London exchange. "We believe the stock is a good play on our view that energy stocks could be in for a prolonged period of out-performance."

It says that CRH has risen 7 per cent already during 2004 but its prospects remain under-rated. "The group's earnings base is attractively diversified, both geographically and sectorally, and CRH has a long-established record of successfully managing both favourable and challenging markets to deliver consistent growth and increased dividends for shareholders."

The firm believes we are now seeing a strong synchronised expansion of the global economy, with the most likely scenario being for this expansion to continue driving forward towards the capacity limits and/or inflationary thresholds that will inevitably require the rate of growth to slow to a more sustainable pace.

The report says markets have experienced a significant revival in inflation worries over the past few months and this is a significant departure from recent concerns that deflation is the main underlying threat.

On interest rates it says that the strength of the global economy now requires the commencement of a significant upward adjustment in the average global short-term interest rate from unusually low levels towards a sustainable equilibrium.