• Log in
• Register free
• Subscribe
• Help
• Take a tour

ANGLO IRISH BANK (ANGL)

Created:

5 January 2007

E15.39 - Banks - With the Central Bank of Ireland forecasting that the Irish economy will grow by more than 5 per cent in 2007, it looks as if the Emerald Isle will continue sidestepping the economic malaise - characterised by high unemployment and anaemic growth rates - that currently afflicts much of the eurozone. And that benign economic outlook is good news for Ireland's banks - with Anglo Irish Bank, whose shares are listed in both Dublin and London, looking especially well-placed.

Unlike its peers, Anglo focuses on lending to small businesses and property developers, meaning that it can avoid exposure to the increasingly difficult retail lending market. That focus has also enabled Anglo to keep its lending margins fairly high at roughly 2 per cent and, unlike many of its rivals, fairly stable as well. This contrasts with other Irish lenders where margins are generally under pressure - Allied Irish Bank, for example, reported an 18-basis-point slide in its lending margin with its half-year figures in August.

Anglo's focus on its specialist lending niche also cuts out the need for a large and costly branch network. Arguably, that leaves the bank as the most efficient lender in the sector. With its full-year results last month, Anglo reported a cost-to-income ratio of just 26.5 per cent. That is even better than Northern Rock's highly efficient 28.9 per cent, and well above Bank of Ireland's chunky-looking 53 per cent ratio. The bank's 30 per cent return on equity is not easily beaten by rival lenders, either.

What's more, with 58 per cent of its loan book in the booming Irish market, Anglo is delivering impressive growth - with the full-year figures management reported that the Irish loan book had jumped by 46 per cent, year on year, to E28.6bn. In addition, Anglo is not just an Irish play. The UK book - largely focused on lending to property-related companies - grew by an impressive 37 per cent, year on year, to E17.2bn, while the bank's Boston operation in the US increased the size of its loan book by a whopping 85 per cent, to E4.4bn.

So, overall, the group's loan book grew 46 per cent in the year to end-September 2006 to E49.1bn, yet credit quality remains impressively healthy. True, the impairment charge rose 50 per cent during the year to E66m, but that still only represents a tiny 0.13 per cent of the loan book and impaired loans represent a mere 0.5 per cent of total lending. Even if bad debts do start rising, Anglo looks better protected than its rivals. That reflects that fact that almost all of the book is secured on property, which could be taken into possession should borrowers start experiencing excessively bad times. By contrast, most of Anglo's rivals, with their large books of unsecured lending, are far more exposed to a sharp deterioration in asset quality.

Admittedly, Anglo's shares are not much of a prize for income investors. Their prospective dividend yield of 1.3 per cent looks especially thin for a bank and most UK banks' shares typically yield more than 4 per cent - indeed, Lloyds TSB's prospective yield stands at over 6 per cent. Nor are Anglo's shares - which trade on about 13 times Goodbody Stockbroker's earnings estimates for 2007 - especially cheap when compared with those of both Irish and UK banks. Bank of Ireland's shares, for instance, trade on roughly 11 times 2007's prospective earnings, while most UK banks' shares are rated on between 10 and 12 times forecast earnings.

However, it's worth noting that, at this time last year, Anglo's shares enjoyed a similar premium rating to rivals, and since then they've risen strongly as earnings ramped up. As the Irish economy continues to power ahead - and given Anglo's sector-beating growth profile, as well as its highly efficient cost structure - it looks likely that the shares will keep on rising. Buy.

*Goodbody Stockbrokers' estimates

Matched bargain trading

Normal market size: 50,000

beta: 1.05

Last IC view: Good value, E14.89, 8 Dec 2006

BULL POINTS

• Impressive loan growth
• Excellent credit quality
• Highly efficient lender
• Stable and relatively high lending margins

BEAR POINTS

• Slender dividend yield
• Shares are not cheaply rated for the sector

• Share Tips
  • Buys
  • Sells
  • Recommendation changes
  • Tip performance
• Companies
• Markets and Sectors
• Columnists
• Stock Screens
• Research Tools
• Investment guides
• Events

requires IC Advantage

---

Registered User

Access a selection of share tips, comprehensive company analysis and full financial data on listed companies. Plus portfolio tools with advanced alerts when you register for free here.

Become a FREE registered user today