The two biggest Irish banks - AIB and Bank of Ireland - are comparablewith the second-tier of British banks but are much smaller than the big fourin the UK. National Australia Bank had made an approach to Abbey National prior to Bank of Ireland's move and it may well renew its interest.
Bank of Ireland's surprise bid to merge with Abbey National has thrown the spotlight on the British banking industry. Over the past decade the sector has undergone a process of consolidation that has resulted in the concentration of a high proportion of the industry into a small number of very large companies.
The largest and most profitable bank is the Royal Bank of Scotland which is the result of the successful take-over of NatWest Bank by its smaller Scottish rival. For many years NatWest Bank had been the poorest performer of the main British clearing banks.
Since the takeover, the new management team has been very successful at improving the overall efficiency of the combined group. Royal is now capitalised at more than £40 billion sterling and enjoys the highest investment rating in the British bank sector with a price-earnings ratio (PER) of 15.
Lloyds TSB, which has been mentioned as a possible suitor to Bank of Ireland, is the next largest British bank (£30 billion sterling) as measured by market capitalisation. It is closely followed by Barclays, which has a market capitalisation of £27 billion. The fourth largest is HBOS (£24 billion), which is the result of a merger between the Halifax building society and the Bank of Scotland.
These four large institutions dominate the British banking sector. The remaining banks are much smaller and include Northern Rock (capitalised at £2.7 billion) and Alliance & Leicester that has a market value of approximately £4 billion. The latter was the subject of a botched merger proposal from Bank of Ireland just over two years ago.
Abbey National is the largest of the second tier of British banks with a current market capitalisation of approximately £9 billion sterling. For comparison, Bank of Ireland is capitalised at €10 billion and AIB is capitalised at €11 billion. Therefore, in terms of size the Irish banks are comparable with the second-tier of British banks but are much smaller than the big four British banks.
Much of the consolidation that has occurred in Britain has involved former building societies. Up until the early 1980s, virtually all of the British building societies operated under a mutual capital structure. However, throughout the 1980s and 1990s the vast bulk of the sector demutualised and listed on the stock market.
In most cases the newly listed companies were protected from take-over, usually for a period of five years. Once this period expired, the former building societies often became the subject of takeover bids or merger proposals.
Activity in the Irish market shows some similarities with this pattern, although the relative importance of the Irish building society sector was always smaller than in Britain. The largest Irish building society, the Irish Permanent, was the first to demutualise. It subsequently merged with Irish Life to become Irish Life & Permanent. First Active is the only other former building society to list on the Irish Stock Exchange and it is generally considered as too small to survive as an independent entity in the long run.
Of the other building societies, ICS has been part of the Bank of Ireland Group for many years, Irish Nationwide is unlikely to remain as an independent entity over the long term, which leaves the EBS as the only large Irish mutual building society that is likely to retain its current status.
In both Ireland and Britain, the process of consolidation is constrained by the already high degree of concentration in the banking industry. In Ireland any attempted takeover by Bank of Ireland or AIB would be the subject of intense scrutiny by the competition authorities.
Likewise in Britain, the four big banks are virtually precluded from undertaking large-scale domestic acquisitions due to competition considerations.
Therefore, any takeover battle for a company such as Abbey National does tend to limit the field of potential buyers to non-British based institutions. National Australia Bank had made an approach to Abbey National prior to Bank of Ireland's move and it may well renew its interest. There are no other obvious candidates that might get involved in a bidding battle for Abbey.
The majority of banks on Continental Europe are going through very difficult times with weakened capital positions due to falling stock markets and worries about an imminent rise in bad debts. Furthermore, the long-term return on capital achieved by European banks has historically been far below the rates achieved in Britain and Ireland. In any event, cross-border banking mergers or take-overs have in general been fraught with difficulties.
Therefore, the bid that is on the table from Bank of Ireland could well be the only approach that is made to Abbey National. However, in the absence of a change of heart from the Abbey National board, it is difficult to see it succeed.
The current terms on offer from Bank of Ireland would fully stretch the bank, and it is very difficult to envisage it improving on its current offer. A period of stalemate seems the most likely outcome, at least in the short term.
