The financial services sector has had a good year in 1997. Strong growth in the domestic economy has meant good demand for loans and other banking products. Rising employment has boosted savings and the demand for insurance and investment products. And, in a buoyant economy, bad debts and company failures are probably at their lowest ever levels.
Preparation for European Monetary Union has been a big focus this year (1997) for the banks, building societies, insurance companies, credit unions, lessors and other companies that make up the financial services sector. With the single currency apparently on target for launch on January 1st, 1999, all of the financial institutions have put preparation strategies in place. Most of the financial institutions have spent considerable time this year holding briefings for customers on the changes they can expect when monetary unions starts.
Coping with monetary union alone could cost the Irish banks up to £100 million initially. This will happen because of the loss of foreign exchange income, reductions in interest margins (as interest rates converge throughout Europe) and transition costs, the Economic and Social Research Institute has estimated. Transition costs will include staff training, marketing and public relations programmes as well as adjusting existing systems, including ATM's and credit cards, to cope with the new euro currency notes and coins. The extent of foreign exchange losses will be muted initially because Britain will not be part of the euro at the start. The currencies expected to make up the first batch of euro members will account for less than one-fifth of current Irish foreign exchange transactions, according to the Irish Bankers Federation. Sterling and the dollar exchange deals, which account for the bulk of this business, will not be affected.
But the Irish banks are confident that the ultimate cost of EMU will only be a fraction of the £100 million initial hit. They expect to benefit from new business opportunities in an enlarged market. But there are some serious concerns. These include the dangers for the Irish funds management and bond market trading businesses if activity within the euro area becomes concentrated in one or two key centres.
Increasing consolidation, cross sector mergers and takeovers and the entry of new non-traditional competitors into the markets were features of financial services industry worldwide during the year. Consolidation, building scale and controlling costs are seen internationally as the keys to long term viability and revenue growth in a competitive operating environment. The announcement towards year end of the merger of Swiss Bank Corporation and Union Bank of Switzerland merger to create the world's largest commercial bank is just another sign of what is to come.
AIB and Bank of Ireland both made significant acquisitions in 1997. AIB bought Dauphin Deposit Corporation in the US for £840 million and has expanded into Eastern Europe, taking control of Wielkopolski Bank Kredytowy in Poland. Bank of Ireland concentrated on Britain, acquiring the Bristol and West Building Society for £600 million sterling.
But there has been no merger/consolidation activity in the domestic banking market this year. The expected sale of TSB Bank failed to materialise and ACC and ICC banks were still in State ownership at the end of the year. Because the Irish market produces strong profits, some analysts expect a bid for AIB or Bank of Ireland by the year 2005, or even a merger of the two banks, Swiss Bank Corp/ UBS style.
Bank of Ireland's acquisition of life assurance company New Ireland was one example of cross-sector activity in 1997. International mergers and acquisitions lead to some consolidation and some withdrawals from the relatively small Irish market. The French group UAP sold Irish National to Eagle Star and New Ireland to Bank of Ireland - in France UAP merged with AXA to become Europe's largest insurer.
Eureko, which owns Friends Provident and Celtic, acquired the direct operator Touchline as French insurer GAN exited the Irish market. AMEV was sold by its Dutch/ Belgian owners, Fortis, for £13 million to Royal & Sun Alliance. Dutch group ANSVAR pulled out of the market making an arrangement with Guardian PMPA that it would offer renewals to clients. Other consolidations included the takeover by Hibernian of the commercial lines business of Celtic from Eureko. Hibernian signed a strategic agreement with Bank of Ireland to underwrite all Premier Direct's insurance business, replacing Cornhill from January 1998.
A looming challenge for the traditional financial services companies is the arrival in their market of new competitors with large customer lists and low cost structures. Companies such as Marks and Spencer, Tesco and Virgin have decided that loans, savings and insurance policies are just other retail products which can be sold by anyone with a large customer base and access to technology.
Because these non-traditional suppliers already have strong customer relationships and do not have costly branch structures specifically for "banking" products, they will often have a cost advantage over the traditional players.
Other moves to watch in the financial services sector are the proposed mergers of four of the Big Six accounting firms - which are subject to the approval of a number of international regulatory and competition authorities. A merger of KPMG and Ernst and Young would create the world's largest accountancy and business advisory firm with fee income of just under £10 billion sterling. A merged firm would be the undisputed leader in the Irish market in fee income terms, as long as the merged operation can retain its current level of fee income.
A merger of Price Waterhouse and Coopers and Lybrand firms would create a global firm with fee income of £7.5 billion sterling. But the merger proposals have been questioned by the international Association of Chartered Certified Accountants. A merger between two of the world's Big Six firms was "unnecessary" and would result in a further reduction in choice for clients, ACCA has warned.
