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
Arts and Entertainment
The Doctor and Clara have their first real heart to heart since he regenerated in 'Deep Breath'
TV
Life and Style
Apple showed no sign of losing its talent for product launches with the new, slightly larger iPhone 6 making headlines
techSecurity breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Arts and Entertainment
Jamie Oliver
filmTV chef Jamie Oliver turned down role in The Hobbit
News
The official police photograph of Dustin Diamond taken after he was arrested in Wisconsin
peopleDownfall of the TV star charged with bar stabbing
PROMOTED VIDEO
Arts and Entertainment
Jeremy Clarkson, left, and Richard Hammond upset the locals in South America
tvReview: Top Gear team flee Patagonia as Christmas special reaches its climax in the style of Butch and Sundance
News
people
Sport
Ashley Barnes of Burnley scores their second goal
footballMan City vs Burnley match report
Arts and Entertainment
Peter Mayhew as Chewbacca alongside Harrison Ford's Han Solo in 'Star Wars'
film
News
i100
Arts and Entertainment
Man of action: Christian Bale stars in Exodus: Gods and Kings
film
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Tracy Emin's 1998 piece 'My Bed' on display at Christie's
artOne expert claims she did not
News
Ernesto Che Guevara and Fidel Castro, right, met at Havana Golf Club in 1962 to mock the game
newsFidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
News
Hackers revealed Oscar-winning actress Lawrence was paid less than her male co-stars in American Hustle
people
Arts and Entertainment
Clueless? Locked-door mysteries are the ultimate manifestation of the cerebral detective story
booksAs a new collection of the genre’s best is published, its editor explains the rules of engagement
Sport
Robin van Persie is blocked by Hugo Lloris
footballTottenham vs Manchester United match report
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

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

A timely reminder of the bloody anniversary we all forgot

A timely reminder of the bloody anniversary we all forgot

Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
Homeless Veterans appeal: Former soldiers pay their respects to a friend who also served

Homeless Veterans appeal

Former soldiers pay their respects to a friend who also served
Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

Scarred by the bell

The downfall of the TV star charged with bar stabbing
Why 2014 was a year of technological let-downs

Why 2014 was a year of technological let-downs

Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

Will revolutionary Cuba take 'bourgeois' golf to its heart?

Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
The Locked Room Mysteries: As a new collection of the genre’s best is published, its editor Otto Penzler explains the rules of engagement

The Locked Room Mysteries

As a new collection of the genre’s best is published, its editor explains the rules of engagement
Amy Adams on playing painter Margaret Keane in Tim Burton's Big Eyes

How I made myself Keane

Amy Adams hadn’t wanted to take the role of artist Margaret Keane, because she’d had enough of playing victims. But then she had a daughter, and saw the painter in a new light
Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Parting view of Ofcom chief... we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog, Ed Richards
A look back at fashion in 2014: Wear in review

Wear in review

A look back at fashion in 2014
Ian Herbert: My 10 hopes for sport in 2015. Might just one of them happen?

Ian Herbert: My 10 hopes for sport in 2015

Might just one of them happen?
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?