BUSINESS OPINION:A union of the two banks is intuitively attractive and worthy of serious consideration, writes  John McManus

DESPITE SOME encouraging signs to the contrary, these remain desperate times for the banking industry. And in desperate times, deals get done that normally might never have a chance of seeing the light of day.

Suggestions are getting a hearing that 12 months ago would have been unimaginable. Every thing from the sale of Ulster Bank by Royal Bank of Scotland to the break-up of Irish Nationwide is being discussed seriously whenever two or more bankers are gathered together.

One of the most tantalising suggestions is a merger of Anglo Irish Bank and Irish Life Permanent (ILP), not least because it would have the best characteristics of both a shotgun wedding and marriage made in heaven.

Combining Anglo, with its image of swashbuckling entrepreneurship, and the "high-street" style of ILP would be challenging but possibly very fruitful.

The overlap between the two businesses is minimal, with Anglo having no presence in retail banking, home loans or insurance, while ILP is not a player in business banking.

A merger would also create a true third force in Irish banking, one that would be capable of challenging AIB and Bank of Ireland, particularly in the lucrative corporate banking market.

And, as is becoming increasingly clear, size is starting to really matter in banking, both in terms of customer confidence in an institution and in terms of the trust of banking counterparts.

Another point in favour of a merger is that it could most likely be done under merger accounting rules rather than more commonly used acquisition accounting rules.

Put simply, this means that the huge goodwill write-offs associated with mergers of this sort could be avoided, which is of critical importance in the current market, where banks are doing everything they can to strengthen their balance sheets.

It is in this area that any serious case for a merger between the two banks stands or falls. And it is not a foregone conclusion that a merger would either appease concerns about Anglo's dependence on wholesale funding markets or end speculation of a damaging rights issue to shore up ILP, which is currently relying heavily on the European Central Bank's emergency funding measures.

At a fundamental level, the question that has to be answered is whether a combined entity would get a better rating, either from the market or directly from the rating agencies.

If the answer to that is not an unequivocal yes, then the management of the two banks risk compounding their difficulties by trying to execute a merger in the current climate.

Notwithstanding the issues they face, both Anglo and ILP are well understood by the market, and their management teams - while relatively new - are familiar.

The market would not know what to make of a combined entity and its heavy exposure to the Irish market when - notwithstanding the Economic and Social Research Institute's optimism last week - the glory days of the Celtic Tiger are gone.

The market would also need to digest the new management team and, as with any merger, the make-up of the management team would be an issue in itself.

Both Anglo's chief executive, David Drumm, and his counterpart at ILP, Denis Casey, have their problems and neither has been in situ for long.

Of the two, Casey has come in for the most criticism, as he presided over the exponential growth of the bank's mortgage book, which underlies its current funding pressures.

Anglo chairman Seán FitzPatrick is a highly regarded career banker, while ILP chairwoman Gillian Bowler's reputation rests on her entrepreneurial savvy.

But to qualify under the all-important accounting conventions, a merger must be just that - a merger. This, in effect, means that the top roles must be shared between the two existing management teams.

People who know him postulate that FitzPatrick would not let his ego stand in the way of any deal that he thought was in Anglo's best interests, which does raise the prospect of a Bowler/Drumm double act at the helm of a merged group, but Casey no doubt has a different perspective.

A merger of Anglo and ILP is intuitively attractive and worthy of serious consideration.

Both groups have to rethink their longer-term strategy to reflect the sea change in the credit markets and should not be afraid to look seriously at radical options.

But given the specific challenges they face and the lack of clarity over the benefits of a merger, one suspects that the temptation for the boards of both banks is to stick to the knitting.

jmcmanus@irish-times.ie