Investment column: Emu is the key for Bank of Ireland

WOULD-BE investors in the Bank of Ireland (BoI) should try and answer the $64,000 question: will Economic and Monetary Union (Emu) be a success?

The healthy state of the Irish economy has been an important factor in BoI's recent success. A combination of low Irish inflation and strong growth rate helped the group make pre-tax profits of IRpounds 530.4m (pounds 461.2m) for the year to March, a jump of 34.1 per cent. The dividend rose by 30 per cent to IR23.0p a share.

Two weeks ago, Ireland was formally given the green light to join the first wave of Emu. The BoI, unsurprisingly, is upbeat about the introduction of the euro, stressing the enhanced opportunities for inward investment. But Irish interest rates are currently above most European rates. Given that a common rate must apply across all participating states from 1 January, Irish rates will have to come down. This could destabilise a hitherto healthy economy and erode margins in the mortgage market.

However, it is unfair to attribute the entirety of the BoI's profit growth to the healthy Irish economy - only around half of the bank's profits flow from the Irish Republic.

Bristol & West (B&W), the UK building society which became part of the Irish group in July, was another driver of profit growth. B&W brought in profits of IRpounds 92.3m last year, and continues to thrive in a competitive UK mortgage market. .

Maurice Keane, BoI's chief executive, is not averse to an acquisition or two - possibly another UK building society - and corporate activity of this type should give BoI's shares an added boost. The shares closed yesterday down 34p at 1258p in London and down IR40p at IR14.50p in Dublin after a bout of profit taking.

Brokers' forecasts, upgraded slightly in the light of yesterday's figures, put the bank on a forward p/e of around 18, pretty standard for this type of stock. At first glance, this makes BoI look good value, given the solid across-the-board growth in its businesses. But when you factor in the uncertainties that Emu will bring, the shares seem fairly priced.