Irish Life & Permanent ended 2001 with a warning to the markets that it would not meet some analysts' forecasts and signalled that falling interest rates will further depress profit margins in its mortgage business in coming months.
Like all financial services companies, much of Irish Life & Permanent's performance is linked to the fortunes of the investment markets. Falling interest rates and slowing economic growth create further pressure. The company estimated that weaker equity markets will knock between €25-€30 million (£19.7-£23.6 million) off its profits, with losses from its 30 per cent associate company, Allianz Irish Life, shaving a further €1-€4 million off the bottom line.
The market has already been factoring in slower profit growth across the financial sector next year, with growth now expected to be in single rather than double digits at the two biggest banks, AIB and Bank of Ireland. All eyes will be on Bank of Ireland's incoming chief executive, Mr Michael Soden, when he formally takes over the reins next spring. The market will watch to see in what direction the new chief executive will want to steer the bank - with high expectations that he will wish to make an acquisition.
Bank of Ireland is committed to the Irish and UK markets, and many analysts believe any further expansion is likely to be in Britain. So far, the bank's preferred strategy in that market has been to build on its fee-earning advice-based businesses, adding to its mortgage and financial services operations, Bristol & West.
There has been much speculation about the bank's options and whether it would launch a bid to merge with or acquire one of the UK's large mortgage banks. Outgoing chief executive, Mr Maurice Keane, led an ambitious plan to merge with Alliance & Leicester but the deal was abandoned. In the Irish market the most likely takeover target would be Irish Life & Permanent.
Bank of Ireland is forecast to have surplus capital of about €1.8 billion by 2004, and so could consider substantial cash acquisitions. With 60 per cent of its earning generated in the Republic, a slowdown in growth here will mean weaker profits growth going forward. The bank looks well positioned to withstand any deterioration in credit quality. Some 53 per cent of its loan book consists of mortgages, so it is not expected to have to make large provisions for bad debts.
AIB has also experienced a change at the top, with Mr Michael Buckley now leading the bank. The markets seem reassured that AIB remains committed to the US market, will continue to consolidate its position in Poland and is well positioned to generate good profits growth in the Republic. The bank has indicated interest in making further acquisitions in the US, focusing on the not-for-profit sector.
Poland will continue to be a challenging economy for the bank, which is now the fifth largest in that market. It is unlikely to consider any further acquisitions there for the time being, and will be fully focused on integrating its existing businesses.
In the Republic, the bank recently reached agreement with An Post to allow personal customers lodge and withdraw cash at 1,000 post offices around the State. The deal will give the bank additional distribution channels and remove some of the processing burden from the branch network.
Anglo Irish Bank enjoyed another strong year in 2001, but will also experience a slowdown in line with the sector in 2002. The bank has established a highly profitable niche in the small business sector. Amid deteriorating economic conditions, a key concern going forward for the bank will be the quality of its loan book and the extent of any increases in provisions for bad debts that may have to be factored in.
The Dutch Rabobank group is the new entrant this year and it will be interesting to see plans for its newly-acquired Irish business, ACCBank. Rabobank says it has no plans to change the ACC brand but will put its imprint on ACC products and services, particularly mortgages, savings, deposit accounts, leasing and fund management.
Rabobank is a mutually-owned society with 40 per cent of the mortgage market in the Netherlands. It will be the third mutual to operate here alongside Irish Nationwide and EBS.
Irish Nationwide signalled changes earlier this month with the appointment of Treasury Holdings' former chief executive, Mr Maurice Harte, as chief general manager and a director of the building society. Despite the assertion of chief executive, Mr Michael Fingleton, that he has no plans to step down, the move would leave a wider management structure that could facilitate such a change in the future. The organisation has made no secret of its desire for a change in building society legislation to allow it to shed its mutual status.
The two Scottish-owned banks, Bank of Scotland and Ulster Bank, are likely to continue to focus on their core small business and mortgage markets. It has been a busy time for the newly-merged Halifax Bank of Scotland group, which is continuing to digest the two businesses. In the Republic, Bank of Scotland is also absorbing ICC Bank into its operations. Its foray into the mortgage market here is expected to continue, although it has won only a very small proportion.
Royal Bank of Scotland, which owns Ulster Bank, is likely to remain committed to its Irish operations, which have been extensively reorganised.
Most analysts expect the two Scottish parents to remain focused on the UK market for the foreseeable future before considering any further acquisitions in other regions.
The fortunes of National Irish Bank are also tied to what its Australian parent does next. National Australia Bank has been searching for an acquisition in the UK market for a considerable time and seems determined to achieve its objective. Any link-up in the UK market could impact on Irish operations.
All the banks will be hoping that economic conditions will improve as expected in the second half of 2002 - and underpin profit growth.
