Scots and Irish to merge US retail banking

JOHN EISENHAMMER

Financial Editor

The Royal Bank of Scotland and Bank of Ireland announced the merger of their US community retail banks into an operation with combined assets worth pounds 9.3bn ($14bn).

Bank of Ireland's First Holdings Inc, which owns First New Hampshire Bank, is to be rolled into the bigger Citizens' Financial Group of the Royal Bank of Scotland.

The merger is the latest move in a surge of banking consolidations in the US as regional banks seek cost advantages in size.

The terms of the merger value the enlarged New England operation, which will continue under the Citizens name, at $1.85bn. It will create the third- largest commercial bank holding company in New England with 222 branches, focusing on consumer banking and lending to small- and medium- sized businesses.

"I think it is a very good deal for both banks. It makes a lot of sense to get together in what is effectively the same banking market. I reckon you could get rid of 12 per cent of the combined bank's costs, the equivalent of 40 per cent of the Bank of New Hampshire's cost base, just by centralising everything," said Hugh Pye, analyst at BZW.

Royal Bank of Scotland will hold 76.5 percent of the enlarged operation. Bank of Ireland will receive stock representing 23.5 per cent of the merged entity valued at $435m together with cash and loan notes with an estimated value of $220m which includes $35m in respect of specified tax losses carried forward. It will also receive up to $26m deferred cash consideration if other tax losses are realised in the future and will retain ownership of Bank Ireland First Financial, a small leasing subsidiary which has a book value of $24m. Bank of Ireland will also nominate two members to the board of Citizens and will be represented on board committees.

Citizens Financial Group reported pre-tax profit in the year to September of $170m, and Bank of Ireland First Holdings profits of $32m in the six months to September.

The earnings of the enlarged bank will be substantially increased by synergy benefits, mainly cost savings as the support functions of Citizens and First Holdings are combined in areas such as head office and technology. Additional benefits will come from sharing product development, marketing expenditure and technology investment.

Mr Pye added: "I think there is a good chance of the combined bank increasing revenues by 5 per cent, getting pre-tax profits up by $80m, which would add between 3 and 5 per cent to the earnings per share of both banks. Together the banks will enjoy a very strong market share, either to carry on with or to sell at a later stage."

George Mathewson, Royal Bank chief executive, said: "This is a good deal. It will bring strategic and financial benefits to both of us. It will increase our earnings per share without the need to add new capital."