FOR Bank of Ireland, the expected takeover of Bristol & West Building Society is the biggest strategic move in the bank's history.
The occupants of the executive offices on the top floor of the Baggot Street HQ will be hoping that it turns out better than the bank's previous biggest acquisition - the ill fated purchase of First New Hampshire Bank in the US almost 10 years ago.
But while First NH turned into a financial embarrassment for Bank of Ireland and a black hole from which it is now only finally extricating itself, Bristol & West looks an altogether better investment, with little risk and a good deal of potential, The key challenge for Bank of Ireland - provided there are no last-minute hitches and the deal goes through - will be to wring sufficient savings from its new subsidiary.
For Bank of Ireland, the move to acquire a British building society seems an inevitable result of its disengagement from the US and the lack of scale that the bank has built up in Britain. Neither its 27 strong branch work or its Bank of Ireland Home Mortgages (BIHM) mortgage lending subsidiary have been large enough to generate a return for the bank.
"Bank of Ireland really had to do something in the UK or think of getting out altogether as it did with British Credit Trust; it couldn't have stayed as it was," one analyst said yesterday. The need for Bank of Ireland to expand in Britain was emphasised at the interim results stage when it emerged that it was generating 77 per cent of its profits in Ireland. All very well when the Irish economy is powering ahead, but an unhealthy dependence on Ireland if the current economic boom comes to a sudden end.
Bristol & West is a solid business, particularly as it has taken radical steps in the past two to three years to reduce what had been a disproportionately high level of bad debt and repossessions. Now, analysts believe that Bristol & West has a healthy mortgage book with little likelihood that its bad debt situation will deteriorate.
The acquisition of Bristol & West will also come at a good time for Bank of Ireland's BIHM mortgage lending subsidiary. Unlike building societies, which source most of their funds from deposits, BIHM obtains its funds from the wholesale money market - a market that is an expensive source of funds when deposit rates are very low.
SOME analysts believe that BIHM is currently doing little more than breaking even and may even be making small losses. Bristol & West's deposit bases would be a perfect complement to BIHM and its money market funding.
Analysts in Dublin and London - who did not want to be quoted ahead of the formal announcement - believe that the sums mentioned for Bristol & West are reasonable. However, some believe that Bank of Ireland will need to generate some savings out of the building society possibly as much as £20 million.
Bristol & West has a cost/income ratio of around 53 per cent, far higher than the 30 per cent cost/income ratio at which some of the bigger societies operate. The prospective purchase price would only give a return on investment of around 8 to 9 per cent, well below the groups 1994 average, figure of over 20 per cent. Bank of Ireland would be hoping to boost this return considerably through the synergies achieved with its existing British business.
"If the price is £600 million, then it is not over the top, but if Bank is thinking of paying substantially more than that then the market may not be too pleased," said one analyst.
A price tag of £600 million means that Bank of Ireland would be paying a multiple of 1.75 times Bristol & West's book value - the excess of its lending assets over its deposit liabilities. This is broadly similar to the multiples that have been paid for some other British building societies, but some of these are leaner operations than Bristol & West, with its 53 per cent cost/income ratio.
Abbey National paid about 1.5 times book value for, National & Provincial while Lloyds paid around 1.8 times book value for Cheltenham and Gloucester. Both of these operate on a substantially lower cost base than Bristol & West.
Bristol & West has a very solid deposits base, through 1.2 million savings accounts in 159 branches in the west and south west of England. But the building society could come under margin pressure if the battle for deposits in the British market intensifies.
So far, however, building societies margins have been held at around 2 per cent despite the mortgage war that pushed British mortgage rates to their lowest level for 30 years.
The key factor for the societies is that they have also managed to cut the rates paid to their savers and so maintain the net margins on their core business. Bank of Ireland will be hoping that it can continue to protect margins in Britain and that growth in the British economy will boost business volumes.
The bank will also welcome signs of recovery in the British housing market in the latest survey from the Halifax Building Society, which reported a 2.2 per cent rise in prices over the past two months. If this is the first sign of a recovery in the British housing market, then bad debt levels in Britain will fall, confidence will rise and the timing of the acquisition may turn out to be opportune.
