The Irish Market - What Lies Ahead? Donal Forde 24 th October, 2007

2 Irish Stocks Have Fallen Dramatically ….. International Returns (€) YTD

3 Banking/Financial Service Stocks Have Been Particularly Hit..... n ISEQ Financial Index YTD – 23% n P/Es and P/Books on historic lows è P/E of 8 for AIB/BoI è P/Book of circa 1.8/1.9 n Dividend yields exceeding deposit rates Current Prices are discounting a period of very slow growth / imminent recession Not seen since 1994

4 Global Economic Outlook Remains Relatively Positive.. n 2008 will see slower growth è Sub Prime/Housing weighing on US economy è Dislocation of Financial Markets will constrain growth è Food / Oil / Commodities driving inflation threat n But mitigated by determination of FED to sustain growth in the US and the ‘China’ factor Real GDP % US Euro UK n Consensus forecast is for modest growth in Ireland’s main markets

5 So Will We Have A ‘Home Grown’ Recession? n Concerns centre on housing market è Housing output may fall to 50/55,000 units in 2008 n Construction sector impact will be softened by è Resilience of commercial / retail development è Public infrastructure development è Strong spending on home improvements n Impact on wider economy will be softened by è Strength of Services Sector è Sustained Growth in Exports Notwithstanding slowdown in housing, GDP forecasts of circa 3% are realistic

6 Risk Of More Radical Slowdown? n Many factors make this unlikely è Underlying demand for housing is strong (Rental Growth) è Accelerated slowdown in housing output will create scarcity of stock è Larger developers: Strong balance sheets - No pressure to off- load è Personal disposable income to grow by 6 - 7% è Savings ratio to rise to 8% è Inflation to fall to 3% è Public Finances in good shape n Expectation of lower interest rates will be a powerful support

7 General Outlook For Irish Banking Stocks n Recession scenario looks unlikely è Not supported by International outlook è Expected slowdown in housing will still leave economic growth at circa 3% è More radical slowdown at odds with fundamentals Stocks represent good value However: External Sentiment to Ireland Inc will not change quickly ….. May take time before potential is realised

8 Prospects For AIB Group n AIB in a relatively strong position è Minimal exposure to market hotspots (US Sub-Prime/CDOS/SIVs) è Asset quality remains strong across all portfolios è Solid capital position è Resilient funding position Pre-Tax Profit By Geography* n Particular strength in diversity of earnings

9 AIB: Prospects In Our Home Market n AIB Bank (RoI) enjoys superior asset quality è Conservative position on mortgage LTVs leaves us with a very resilient portfolio è Property & Construction loan portfolio is well diversified 36% in Residential Development 34% in Commercial Investment 20% in Commercial Development è 15% of Property & Construction loans are secured on foreign assets

10 AIB: Prospects In Our Home Market n AIB Bank (RoI) enjoys superior growth prospects è Outperforming market growth in Business Lending è Outperforming market growth in Business & Personal Deposits è Growing strongly in Wealth Services - twice market rate of growth in Life & Pensions in H è In line with market on Mortgages, notwithstanding our conservative credit posture

11 The Irish Market – What Lies Ahead? n In Summary: è Irish Stocks, particularly financial stocks, are discounting recession è Evidence and rational analysis points to orderly slowdown … to growth levels of circa 3% è Banking stocks represent good value … but may take time before potential upside is realised è AIB in relatively strong position; Diversity of earnings makes us less vulnerableDiversity of earnings makes us less vulnerable Irish business has superior risk profile and growth prospectsIrish business has superior risk profile and growth prospects