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.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  2. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  3. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  4. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  5. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  6. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  7. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  8. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  9. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  10. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
  1. The New Deal

    A series of domestic programs designed to help the United States ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. How does the risk of investing in the industrial sector compare to the broader market?

    There is increased risk when investing in the industrial sector compared to the broader market due to high debt loads and ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!