Allied Irish Banks Downgraded To Hold From Buy

We are reducing our recommendation to Hold from Buy on Allied Irish Banks, p.l.c. (AIB). In its first half report, AIB posted net earnings before nonrecurring items of 922 million, down 3% year over year, but above our estimate largely due to a lower effective tax rate.

However, we are slashing our diluted EPADS estimates to reflect substantially higher loan impairment provisions to $5.70 from $6.20 for 2008, in line with revised AIB guidance calling for an 8%-10% decline in adjusted EPS (down from low single-digit growth in EPS previously), and to $4.60 from $6.50 for 2009.

While AIB’s results should benefit from solid loan growth, this will be offset by sharply higher bad debt charges and declining net interest margins due to slow deposit growth, higher funding costs, and increased competition. AIB increased its interim dividend by 10%. The company’s dividend yield exceeds the industry median by a wide margin.

At its current price, AIB is trading at 4.2X the 2008 estimate and 5.6X the 2009 estimate, based upon consensus estimates for 2008 and 2009, respectively. These are well below the median P/E ratios for the industry, also based on consensus estimates. Our target price of $25 represents about a 5 ½X P/E based on our 2009 estimate of $4.60 per share, providing a PEG ratio (P/E divided by estimated future growth rate) of 0.8X, roughly in line with the median for the industry.

Subscribe by RSS Subscribe by Email