The announcement last week that the Halifax and the Bank of Scotland plan to merge has thrown the spotlight back on consolidation within the financial sector.
The consensus view is that the proposed deal will succeed, although many issues remain to be resolved. These include the allocation of the key executive roles in the new merged entity as well as whether the key head office functions will be located in Scotland or England. The issues surrounding this merger have some resonance with the aborted Bank of Ireland /Alliance and Leicester (BOI/A&L) merger. Although Scottish sensibilities will be an issue, unlike the BOI/A&L-mooted deal, Halifax and Bank of Scotland do operate within the same regulatory jurisdiction and therefore the regulatory issues surrounding the deal are far less complex.
The market capitalisation of the combined Halifax/ Bank of Scotland will be approximately €46 billion (£36.2 billion). This compares with the total market capitalisation of the quoted Irish financial sector of €25.7 billion (see table). Of the quoted Irish companies, only AIB and Bank of Ireland have sufficient scale to be viewed as substantial institutions in an international context.
Irish Life & Permanent (IL&P) has a clear strategy of focusing only on the Irish market and the completion of the TSB acquisition provides IL&P with greater scale and a full range of financial products in the domestic market. While IL&P has some small overseas interests, the management has taken the view that the company simply does not have the scale to be able to successfully diversify into overseas markets.
Anglo Irish Bank and First Active are tiny and are likely to continue to serve their respective niche markets. A takeover by another institution is always a possibility. However, both these companies are probably too small to be of interest to most financial institutions.
Of the quoted Irish financial sector only AIB and Bank of Ireland are of sufficient scale to enable them to participate in cross-border consolidation. Up to now the majority of banking and insurance mergers and acquisitions have occurred within national boundaries. The advent of the euro was expected to generate more activity on a pan-European basis. As of yet there is scant evidence of this occurring and it does seem as if most of the action for the foreseeable future will continue to be driven by national corporate activity. As time goes on and once the euro becomes better established it is likely that the incidence of pan-European merger and acquisition activity will increase.
In this environment the strategic options facing AIB and Bank of Ireland seem limited. Both banks are relatively small in European terms and are likely to be the smaller partner in any merger situation. However, as the Royal Bank of Scotland showed with its successful takeover of Nat West Bank, a smaller player can acquire a larger entity in the right circumstances. Nonetheless, it would seem that it is the difficulties associated with cross-border mergers that probably presents the critical barrier to the two large Irish banks. Until such deals become easier, overseas acquisitions by the Irish banks are likely to concentrate on niche markets such as AIB's Polish operations. Despite the concentration of market power within the Irish marketplace, further consolidation among the current players should not be entirely ruled out. With several British banks now offering products in the Republic, consumers seem set to benefit from intensifying competition irrespective of whether there are more mergers and takeovers between the existing incumbents.
For investors in the Irish financial sector the strength of their domestic franchises remains the key driver of their respective investment returns. Historically, the management of these companies have shown themselves to be adept at adapting to changing circumstances and it seems a fair bet that they will continue to manage the businesses effectively in a pan-European context.
