Monday, 15 November 2010

Time to break up Bank of Ireland?

Given the dire state of the Irish economy and the freefall in the share price of Bank of Ireland, now would be a ideal time for a player who wants to enter the UK banking market to make an offer for Bank of Ireland's UK banking operations.

What they would get is an established network of 11,500 outlets, a brand (The Post Office) that is trusted and, most importantly, isn't seen as a 'bank' and also isn't seen as one of the organisations that got the country into the current mess. Buying the UK operations has recently become easier, not just because of the problems that the Bank of Ireland faces in its domestic market, but because since November 1st the UK operations have become a separate subsidiary with its own board and regulated by the FSA. By creating this entity separation becomes easier.

As the recent OFT report on barriers to entry stated two key factors inhibiting customers switching to new entrants is brand loyalty and customers' preference for a branch network. By the acquisition of the Bank of Ireland UK operations these two barriers can be swiftly overcome.

Selling their UK operations is not something that Bank of Ireland would want to do. The UK is seen as a growth market and where future profits will come from, whereas any growth in their domestic market share would be severely frowned upon. However should the Irish economy deteriorate further, as seems to be likely, and Bank of Ireland require further funding from the government, then the disposal of the UK operations may no longer be optional. As has been seen with both Royal Bank of Scotland and Lloyds Banking Group, there is a price to pay for governmment funding in terms of forced disposals. For an entrant with access to capital this could make for a very sweet deal.

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