Monday, 22 November 2010

Irish Banks to shrink

Brian Cowen, the Irish Primer Minister declared that Ireland's banks will become "significantly smaller" as a result of the financial bail-out by the IMF and the EU. This is as was predicted in this blog ("Time to break up Bank of Ireland?") on Monday 15th November. Mr Lenihan went on to say that the Irish banks would have to sell all non-essential foreign assets. Whether the Bank of Ireland's UK operations can be regarded as "essential assets" needs to be clarified, but whilst they are seen as an alternative source of income and an area of long term growth for the Bank, it is unlikely that there will be any other outcome than they will be put on the block.

Fortunately for any potential purchaser, the Bank of Ireland has already wrapped up these assets and put a bow on them by, at the beginning of November, putting them into a separate subsidiary, registered in the UK and regulated by the FSA.

The Bank of Ireland UK assets consist of a banking licence, guaranteed distribution through the 11,500 Post Office outlets and an established, trusted brand (The Post Office) which isn't seen as one of the banks that brought about the financial crisis. For any would-be new entrant to the UK banking sector this could represent a more attractive option than acquiring either Northern Rock or the 600+ branches that Lloyds Banking Group must dispose of, both of which would be more complex to acquire and establish, not least of all because of the challenges of taking on a large branch network with all the people and technology issues associated with that.

It shouldn't be understimated how difficult and the level of risk associated with taking on a large branch network would be for a new entrant. As has been recently seen by the acquisiton of the English-based Royal Bank of Scotland branches by Santander, the customers don't always like the idea of being sold to another bank without their say-so.

For a new entrant acquiring the Bank of Ireland UK operations the acquisition could, certainly in the short term, be almost invisible to the customers. They would still be able to go into the same branches (post offices) that they have always done, with the same branding over the door and the same staff serving them. This would give the acquirer the time to decide what to do with the back office processing and to be able to evolve the service over time and in a controlled way.

As the OFT said in its recent report, the challenge for any new entrant is to establish a branch network, to create trust in the new brand and to persuade customers to transfer their banking relations to the new bank. With an acquisition of the Bank of Ireland's UK Operations each of these challenges becomes easier than for the alternatives.

The bailout of Ireland and the Irish banks could just be the catalyst to create new competition in the UK banking market.

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