11/01/2013

My Investment Recommendation for 2014

My Investment Recommendation for this month is Allied Irish Banks PLC (AIB). Allied Irish Banks plc is a multinational banking institution based in Ireland that provides services varying from investment banking to asset management services. With an $18.45 billion market capitalization, the Company is the largest regional financial center based in Ireland standing a head above its $13 billion competitor in The Bank of Ireland. Trading as an American Depository Receipt under the US exchanges, Allied Irish Bank (AIB) currently trades at a current price of $41.91 with an approximate P/E ratio of 6.5 despite an industry average of about 10.

While the short-term outlook for AIB’s business remains somewhat up for debate in light of the credit market issues found in both the United States and in Europe, the medium- and long-term outlooks for AIB remain positive. While the economies in the United Kingdom and in Ireland are expected to slow down this year, they are anticipated to pick up again going into 2014. The GDP growth of Poland looks to stay well-above international averages hovering around 5%. Last of all, the downturn economy found in the United States will likely recover from monetary stimulus beginning from the second half of 2013. Combined, AIB’s target economies look to fully sustain themselves and begin to recuperate as 2013 comes to a close.

My Investment Recommendation - why?

The unexpected sub-prime mortgage crisis that recently took the markets by storm has sounded the panic alarms over the last half year for both banks and investors alike located in the United States and in Europe. Yet oddly enough, AIB was able to mostly side-step the sub-prime mortgage fallout when compared to its competitors. In the US market, AIB was only affected through its holdings in M&T Bank (based in the United States) which saw a mere 7% overall decline in it’s holding’s profits. Likewise, AIB’s European subprime exposure was relatively minimal compared its rivals, having only written off about 30 million euro in subprime-related securities.

What differentiates AIB from its international competitors, however, is its approach to targeting the economies to which it is bound. In the UK, where 30% of AIB’s pre-tax profits came from, even with the looming recession on the horizon, AIB managed to increase its regional profits by 20% by concentrating on corporate banking that bypassed the immediate consumer woes. Slowdowns in both the Republic of Ireland and Poland alike were also met by surprisingly successful returns. In Ireland, where 43% AIB’s pre-tax profits were derived, operating income increased 14% over 2012. In Poland, AIB’s operating income likewise increased an encouraging 26% in 2013.

Nevertheless, a quick look at the company’s stock would paint a quite dimmer picture than the reality portrayed on the financials. Uneasy investor sentiment concerning the financial sector has inadvertently brought down AIB’s value by association. Falling about 33% from the 52-week high of $63.16, AIB currently trades around $41.91. Even after declaring single digit growth expectations (although down from previous years) for 2014 despite a worldwide credit crunch, AIB continues to linger around this undervalued price range of the low $40’s. As the financial sector recovers, I believe that AIB will find itself in a highly favorable position compared to its peers through its strong capital position and competent level of funding support.

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