Alan Greenspan, in recent weeks, has spooked the markets with his comments about the possibility of a recession in 2007.
His announcements come amidst news about sub-prime lenders having some liquidity issues.
Leaving aside Mr. Greenspan's less-than-outstanding past record of economic forecasting, the pronouncements have left investors nervous about the financial sector.
For those wishing to have exposure to the banking segment without some of the worries impacting the domestic banks, they may find some decent values overseas.
One of the dominant banks in a country with a booming economy is Allied Irish Banks PLC (NYSE: AIB).
AIB is one of the top two banks in Ireland and has strong positions in financial services in other countries including the U.S., Great Britain and Poland.
The banking markets in Ireland are very consolidated, as AIB and its largest competitor, Bank of Ireland, are estimated to control over 70% of the market share for personal accounts.
In addition, AIB has been a big beneficiary of Ireland's booming economy. Ireland saw GDP grow at 6% last year and job growth up 5%. Going forward, growth is expected to moderate but still be solid.
The operating results of AIB, reflecting the economic strength, were robust. Loans in Ireland operations grew 32% and its capital markets segment's operating profits grew 46%.
In the U.K., loans increased 19%. Loan growth in Poland due to strong business lending grew 36% and the company's Polish operations now contribute 13% of pre-tax profits, up sharply from 3% just 3 years ago. M&T, in the U.S., saw profit increase 10% excluding the effects of accounting changes.
The key to AIB's success has been its ability to keep its growth in expenses below its growth rate in income. In 2006, income grew 4% faster than expenses. However, loan growth exceeded deposit growth by 500 basis points.
This trend, along with a change in product mix ,has put some additional pressure on net margins which fell 12 basis points. AIB's goal is to have the growth of income exceed growth in expenses by 3% long-term. AIB continues to easily meet that goal.
In 2007, it is expected that net margins will be a bit pressured by loan growth exceeding deposit growth. After 2007, AIB expects net interest margin to increase back to its historical level of 2.5%.
Charge-off for loans remain below the industry average, but AIB expects a marginal increase back to its long-term average of 0.25%. AIB has not re-possessed any home from a default in 10 years. This is an important note as AIB's real estate loan portfolio has increased from 20% of total loans to 40%. Overall, credit quality is high.
On a valuation level, AIB sells at a 20% discount to its peers on a P/E basis. Additionally, current Street estimates are expecting earnings growth in 2007 to be around 7%. Management recently announced that it expects low double-digit growth in 2007. This would imply earnings in 2007 of approximately $4.90 and a P/E of about 12x.
This is not as inexpensive as some other international banks, however AIB does not have the implicit risk that the others carry. AIB trading at 12x is at a discount of about 10% to the banking universe overall. The continued growth in net income contributes to a solid 1.2% ROA and 22.2% ROE for AIB.
AIB also pays a handsome dividend at 3.20% versus the sector's median of 2.05%. AIB has increased its dividend 48% on a compounded average annual basis since 2002. Increases in dividends are expected to continue and it is estimated based on 2007 earnings estimates of $4.91, the dividend could rise to about $2.00.
For those wanting exposure to the financial sector beyond the typical bank, Barclays (NYSE: BCS) and Deutsche Bank (NYSE: DB) offer that exposure. It does, however come with a higher risk profile. BCS and DB, in addition to having banking operations, operate in the brokerage, investment banking, merger & acquisitions, hedge fund and derivatives space. These areas can be quite profitable but extremely volatile. To reflect that risk, DB is selling at about 6x 2007 earnings estimates with yield of 2.00%. Barclays, is selling at 9x times earnings estimates but with a strong yield of 5.00%.
Barclay's is the dominant player in the ETF market that is exploding and has been making great inroads into the emerging markets of China and India. Here is where the potential is vast but also carries an enormous amount of risk. BCS's banking franchise is not particularly strong, especially in the U.K.
For those seeking some income and growth to ride out the uncertain U.S. markets, AIB is an attractive choice. For those with a higher risk profile might be attracted to Barclays sizable dividend yield. Both offer global exposure to the financial service sector.
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