Bank of Ireland shares have lost the gains made on Monday, affected by a general decline in European banking stocks and by some concerns among market analysts about aspects of its proposed deal with Alliance & Leicester.
The Bank of Ireland shares, which rose by more than 4 per cent on Monday after the bank confirmed it was in merger talks with the former British building society, finished more than 5 per cent lower yesterday at €18.40 (£14.49), down €1.00 on the day.
The fall was in tandem with the weakness of bank stocks across Europe, which some dealers attributed to nervousness about the impact of the millennium bug. Dealers in Dublin also said concerns were emerging about the significant exposure Bank of Ireland would now have to the British mortgage market and about the ceding of the chief executive post to the UK institution.
"There is less enthusiasm about the deal with growing scepticism seeping through," one trader said.
In a note on the proposed merger, ABN-Amro in Dublin cut their rating on Bank of Ireland stock to "hold" from "buy". Analyst Mr Eamonn Hughes said that while the proposed merger entity still looks attractively priced, he is nevertheless cautious. "The `cost' of this diversification is the dubious benefit of an increase exposure to the highly competitive UK mortgage market," he said. Writing after Monday's price rise, the ABN-Amro analysts lowered his rating, "pending further details and clarification regarding the proposed structure and strategic development of the merged entity."
While the move would reduce Bank of Ireland's exposure to Ireland he said, it has increased its exposure to the UK mortgage market to 40 per cent of profits. Further acquisitions by the merged entity are likely, he said, possibly even targeting National Australia Bank's UK and Irish operations. While the move puts Bank of Ireland "into play" a counter-bid is thought unlikely.
ABN-Amro in London is even more negative, maintaining its "sell" recommendation on Alliance & Leicester due to the competitive nature of the UK mortgage market. The business logic of the move is "less than clear cut", it says, arguing that they were "non-plussed" by Bank of Ireland's motives.
"Why, given its faster growth and lower rating, is it prepared to merge with a slower growing business?"
Another broker, NCB, takes a more positive approach, arguing that Bank of Ireland may end up not paying a premium for a deal with a UK mortgage stock, in a transaction which could generate material costs and revenue synergies.
"The timing also looks good, given the acceleration of growth in the UK mortgage market," although its does recognise the pressure on margins in this sector. With Mr Peter White of Alliance & Leicester due to be chief executive of the new group, NCB also warns that any dilution of Bank of Ireland's proven management control "is likely to be viewed warily by current investors in the stock."
NCB analyst Mr Shane Nolan also points out that the transaction is likely to be a precursor to further deals by the enlarged entity which should have a better ability to deploy the surplus capital which the Irish operation is expected to generate in the longer run. Investors are also awaiting further details on the precise structure of the proposed new merged organisation. Alliance & Leicester and Bank of Ireland have not yet decided on the exact corporate structure. Although they are firmly committed to a "dual listed company" (DLC) set-up under which the banks would retain their respective London and Dublin listings, they are believed still to be looking at different variants of the principle.
The unprecedented nature of the DLC arrangement for a UK or Irish bank is one of the central issues being looked at by the Financial Services Authority - the UK regulator - and the Central Bank of Ireland, and one which could delay regulatory approval.
"It's not going to be quick," one regulator said yesterday.
Another factor the regulators must take into account is the appearance of setting a precedent for future cross-border mergers, although any such proposed deal would be considered on its merits.
Any delay, however, will increase the partners' nervousness about the possibility of another bidder intervening.
Analysts said yesterday this was still possible, with Lloyds TSB and National Westminster Bank seen as the most likely candidates to bid for A&L. They believe that either could wring out greater cost savings and thus afford to offer a higher price to A&L shareholders. However on balance most observers do not expect any counter bidders.
