Investor: With 60 per cent of group profits generated in the domestic market, BoI is highly dependent on the Irish economy.

It is now more than a year since AIB was hit by the shock news of a major foreign exchange loss in its American subsidiary due to the activities of rogue trader John Rusnak.

Since then Rusnak has owned up to his fraud and will serve seven years in prison. AIB conducted a major internal inquiry under an independent high profile chairman.

The ensuing report, written by Mr Eugene Ludwig, was scathing regarding the internal controls at AIB's Allfirst subsidiary. Not surprisingly several key staff at Allfirst either resigned or were dismissed although no one at AIB headquarters lost their jobs.

However, every cloud has a silver lining and in the case of AIB the Rusnak affair forced the bank to evaluate seriously the long-term strategic value of Allfirst. Several investment analysts had been questioning the long-term prospects of Allfirst arguing that the AIB subsidiary was unlikely to reach critical mass in the large American banking market.

It would seem that in the aftermath of the Rusnak affair, AIB's board and senior management came to the same conclusion. A deal was struck with M&T Bank to merge Allfirst into the much larger M&T.

This created one of the 20 largest US banking companies with AIB holding a strategically important 22 per cent stake. In addition, AIB received a cash payment which will be used to buy back AIB stock once the deal is finally closed.

After AIB's high profile problems of the past year it seems somewhat ironic that investors and analysts now seem to be focusing more critically on the long-term strategy of Bank of Ireland's (BoI) overseas operations. It is true that BoI's somewhat misguided attempt to engineer an agreed takeover of Abbey National did generate a substantial amount of negative investor sentiment.

At the time of the mooted deal with Abbey National investors were very sceptical as to its merits. Such fears would seem to have been well-founded given the very poor performance of Abbey National in recent months. Abbey's life assurance subsidiary has recently drastically reduced bonus payments to its with-profits policyholders.

More importantly from the shareholders' perspective the dividend has been cut and there are fears that soon-to-be-announced financial results may be worse than current expectations.

The recent somewhat lacklustre BoI share price performance means both AIB and BoI are now trading on similar valuation ratings. AIB's dividend yield of 4 per cent is higher than the 3.5 per cent offered by BoI. But AIB trades on a higher price earnings ratio (PER) of 9.4 compared with BoI's 8.5 (see table).

This is in spite of the fact that BoI's earnings per share are forecast to grow faster than AIB's over the next 12 months. Now that AIB's American strategy seems to be resolved, the focus of investors is very much on BoI's UK strategy. With 60 per cent of group profits being generated in the domestic market, BoI is clearly highly dependent on the Irish economy.

The bank has a very strong market position in Ireland and is particularly strong in the low risk and fast growing mortgage market.

With the Irish economy continuing to perform relatively well, the medium term growth prospects for the core Irish business looks quite good.

But BoI's overseas operations do not enjoy such a strong franchise. Its most important overseas subsidiary is Bristol & West, which is a relatively small UK mortgage bank. It has an estimated 2 per cent share of the UK mortgage market placing it just outside the top 10 UK mortgage banks.

It generates approximately 20 per cent of overall group profits and is therefore quite important within the overall BoI group. Most analysts, however, view B&W's 2 per cent market share as being too small to confer any particular competitive advantage.

This is borne out by B&W's poor relative showing on some key measures such as the cost-income ratio and return on equity. It would seem that BoI's senior management take a similar view given their attempts to undertake a major UK acquisition.

From the perspective of investors in BoI the core risks associated with its UK business seem to be twofold. First, there is much talk, so far unfounded, of a housing bubble in the UK that could result in a house price crash similar to that of the late 1980s - early 1990s. Such a development is clearly outside BoI's control, but B&W would clearly suffer if such a scenario occurred.

The second area of risk relates to any actions that the bank may take in embarking on a large-scale UK acquisition. The fear among many investors is that the bank may overpay for any such acquisition thus increasing the overall risk profile of the group.

On a fundamental value basis BoI's shares are now relatively cheap. However, it finds itself facing similar strategic questions about its overseas prospects, as did AIB before the Allfirst/M&T merger. Until there is a clearer resolution of BoI's UK long-term strategy BoI's shares are unlikely to make much relative headway against its peer group.