Irish suitor takes a punt

The City has greeted Bank of Ireland's proposed purchase of Bristol & West with cautious optimism

Opinions in London and Dublin were at odds last week, not over the peace process but as to the virtues of the Bank of Ireland's pounds 600m purchase of the Bristol & West Building Society. While the Irish press and analysts greeted the move with bells and whistles, some in London are sounding a more cautious note.

The deal made waves in Ireland not least because it is the third largest acquisition ever made by an Irish company. The Bank of Ireland is the country's largest mortgage lender with a 40 per cent share of the retail banking market.

Fuelled by the strength of the Irish economy, Bank of Ireland saw pre- tax profits climb to Irpounds 321m (pounds 314 last year) with earnings of 44.2p marking a strong recovery from the dark days of 1991 when profits crashed to Irpounds 31.8m and earnings were just 0.3p.

BOI appears to have been the only serious suitor for Bristol & West and bought it relatively cheaply. But was it cheaply enough? With 1.1 million borrowing and investing members and a network of 159 branches, Bristol & West has a lousy reputation, particularly since its disastrous foray into commercial property lending. Last year it came bottom in the performance league of 20 societies compiled by stockbroker UBS.

Bank of Ireland also comes to the deal with some blots on its escutcheon. The purchase of the First New Hampshire Bank in the US in 1988, just before a collapse in the local economy, proved an expensive move. BOI has now merged First New Hampshire with Citizens Bank, owned by the Royal Bank of Scotland, though it retains a 23.5 per cent stake.

"Bank of Ireland got buried by the US deal," says Shane Nolan, banking analyst at NCB stockbrokers in Dublin. "It has only just got over that."

With that experience still fresh, the Bank of Ireland's chief executive, Patrick Molloy, was last week keen to stress the comparatively low risk of acquiring a building society.

A share buy-back or acquisition had been expected at BOI for some time, given the amount of cash stuffed in its vaults. At the half year capital and reserves stood at nearly Irpounds 1.65bn (pounds 1.7bn) while its tier 1 capital adequacy ratio ahead of the B&W deal stands at a very healthy 8.2 per cent.

Not that the B&W acquisition is simply a means of dealing with the bank's embarrassment of riches. At present around three-quarters of BOI profits come from its Irish-based businesses, which include retail and merchant banking, a building society, stockbroking and asset management.

With limited opportunities for further growth in Ireland, the acquisition gets BOI out of the dilemma of how to diversify, says analyst Matthew Czepliewicz, at brokers Salomon Brothers.

The move gives the bank, which already has a Reading-based mortgage arm, a more respectable foothold in the UK market, building a total mortgage book of pounds 10bn. Bristol & West has a 1 per cent share in the UK mortgage market but particularly attractive to BOI is its strong presence in the South-west where its market share is around 7 per cent.

However, BOI is buying into a market where competition is set to intensify. A recent report from credit-rating agency Standard & Poor warns that in the low-inflation, low-interest rate environment competition between lenders will increase, forcing down margins.

Bank of Ireland could also be seen as taking a sizeable punt on sustained recovery in the UK housing market. Some analysts take a more bullish view, however. "From a shareholders point of view, BOI is buying Bristol & West at the end of the recession in the UK housing market," says Mr Nolan. "Its problem loans have already come to the surface, therefore it is buying it clean."

Martin Cross, banks analyst at brokers UBS, also rates the benefit to BOI even if the UK housing market fails to shine. "If Bristol & West profits don't go up, the deal still enhances BOI earnings, which limits the risk."

A boost to earnings of between 8 and 10 per cent is estimated once the full impact of the deal is felt from 1998 onwards. Analysts expect to see the benefit of combining the two mortgage businesses, offering BOI access to cheaper funding by drawing on B&W's deposit base, rather than the more expensive wholesale market.

BOI says it will look for further cost saving at B&W, although the building society has already tightened its cost/income ratio as part of its improving story, which last year saw profits rise 8 per cent to pounds 77m.

Bank of Ireland

Share price 468p

Prospective p/e 9

Prospective yield 3.1%

Year to 31 March

1993 1994 1995 1996

Pre-tax profits (Irpounds ) 121.2m 277.5m 321.8m 384.8m

Earnings p/share 12.8p 35.2p 44.2p 51.4p

Dividend p/share 9.2p 10.5p 12.5p 14.5p

Salomon Brothers forecast

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Guru Careers: Application Support Analyst / 1st Line Support

£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

Guru Careers: .NET Developer / Web Developer

£45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence