The message coming from economists and equity analysts is that the surprisingly brisk economic expansion seen in the first half of this year should not blind us to the slowdown coming in the second half and, more obviously, next year.

The economy grew at a rather tigerish 4.5% in the first half, according Central Statistics Office. The ESRI is even predicting 4.4% growth for the rest of the year. Yet national accounts data released by the CSO last Thursday also predicted a sharp 25% decline in housing activity during the second half of this year, something that will weigh on the overall economy and especially on the banks into 2008, which will see growth slow to a level below 3%, according to most estimates.

Clearly, this isn't good news for the banks, which have earned a nice chunk of change during the boom years lending to house buyers. But it's not the end of the world either, brokers are saying. According to them, bank stocks have suffered such a big sell-off because investors are overreacting to negative news.

The fundamentals, they say, are sound.

The market is bearish on banks because the subprime inspired credit seizure has dramatically raised the price of interbank lending, which will eventually reduce lending volume and profits. But even though Irish banks have increasingly relied on wholesale funding to meet furious demand for mortgages, exposure is still low compared to European peers.

Moreover, credit spreads have already started to narrow in the UK and the US, suggesting those markets have digested the subprime and Northern Rock catastrophes and are starting to recover.

Analysts here are waiting for the last bomb to go off in the eurozone . . . the betting is on a German bank . . . after which the ECB can make an interest rate or liquidity intervention as the Fed and Bank of England have done. Well, they're crossing their fingers.

SCOTT RANKIN
DAVY STOCKBROKERS

WE had to dust off the Davy monthly books from the early 1990s to find valuations this low. The last time prices were this low we were coming out of a recession, there was a currency crisis and a house price crash in Britain. The levels are now below 2000 levels, when we couldn't give bank stocks away because everyone wanted tech stocks.

We think it's time to start dipping a toe [in financials].

News flow is going to continue to deteriorate, but we're looking through the next three to four months. The economy is decelerating pretty quickly, but at some point the prices are wrong. Irish banks are even way off US banks, where the subprime collapse happened, because the view is out there that Ireland is in deep trouble.

It would be helpful if housing starts stabilised, mortgage rates started falling and there was a good budget with tax reliefs. By spring 2008, supply and demand should be much better. The longer this goes on the greater the problem. The dislocation is not over, but eventually you have to say it's all in the price.

ANNA LALOR
GOODBODY STOCKBROKERS

THERE is significant upside from current valuations, but we can't see any catalysts at the moment. The catalyst will be when the three-month Euribor-base rate spread narrows. It's continuing to rise to high levels [in the euro-zone] while the US and UK are narrowing.

There is a property dependency here. The risk from the drop-off in completions is on the downside, so mortgage book growth will slow. It's not the be all and end all, though . . . as a percentage of overall earnings for the banks it's not that high. And we can take some comfort from the fact that consumption is not linked to housing here as it is in other places, like the US.

DAVID ODLUM
NCB STOCKBROKERS

IRISH banks are trading at valuations seen on only a few occasions over the past 20 years. AIB and Bank of Ireland's ratings currently price in a very sharp fall in earnings.

We the think the prospect of such a collapse in earnings is remote.

In our note we take a critical look at. . . the increased cost of wholesale funding, reduced capital markets activity and sharply lower mortgage activity in ireland.

The bottom line is that after reviewing these issues in detail we are making only minor cuts to our 2008 forecasts. Our new price targets still leave 25%-35% upside. We view the Irish banks as very good value at current levels.

KEVIN MCCONNELL
BLOXHAM STOCKBROKERS

THERE'S a question mark over how much of this is sentiment and how much is reality. A lot of negative news flow is priced in already. If you look at Ireland in isolation, we have very little exposure to the subprime issue, yet our valuation has suffered.

The housing market was too frothy last year, but are the valuations realistic in the absence of a single profit warning from any of the banks? No. We've really taken a caning over this misconception from a read-through on housing. The credit spread is ferocious and there is pressure on European banks in general. It reflects distrust between banks. The ECB could fix the problem with a rate cut or a massive injection of liquidity.

There's a huge strategic opportunity now for people looking carefully at banking stocks, but there may be more short-term pain. The question is where and when will sentiment and reality converge. Eventually investors will get in if prices are cheap enough.

WHY AREN'T PRICES REFLECTING 'REAL' VALUE?

APART from negative sentiment, there are so-called technical factors at play. One theory is that investors who have been buying shares using contracts for difference (CFDs) have had to liquidate their positions to meet margin calls from their brokers. The more selling there is on the market, the lower prices go.

But this is a general issue that affects all stocks, not just the financials. CRH has reportedly suffered really badly too. Of course, CRH is a construction stock with signi"cant exposure to the reeling US housing market, so it's difficult to tease out how much of its valuation can be laid at the door of exiting CFD holders and how much to sentiment or more fundamental causes. The same is true of the banks, although the consensus among analysts is that CFDs are at least part of the story.

What are contracts for difference?

A CFD allow investors to take a position on a company's share price without having to buy the stock. Essentially it's a bet on the stock's price direction.

The contract is usually between an investor and an investment bank, who exchange the difference between the opening and closing price. CFDs let investors trade on margin . . . the investor usually pays less than 20% of the face value of the share . . . which can magnify gains as well as losses.

Despite the risks, CFDs have become very popular in recent years, not least because they don't get taxed the way ordinary share transactions do.

Why are investors liquidating their positions?

In the last few months, the firms that deal in CFDs have significantly increased the amount of cash their clients need to put up to trade. CFD holders have in many cases closed out their positions to raise the money. Also clients that couldn't meet the margin calls had their positions sold.

How significant is the trade in CFDs?

Some market observers say that as much as half of the trade volume on the Irish stock cxchange is related to CFDs. The most conservative estimates still put the proportion of CFD activity at one-third of all trades.