Bank of Ireland set to become biggest bank

IS this going to be the year that Bank of Ireland topples Allied Irish Banks from its perch as Ireland's largest banking group? If AIB's results, out tomorrow, are in line with forecasts, then Bank of Ireland could well generate marginally higher profits this year than AIB, its arch rival.

The general expectation is for AIB to record a pre tax profit of £370 million in 1995. Bank of Ireland is expected to just top that with a pre tax profit of £372 million in the year ended March 31st, 1996. If this happens, then Bank of Ireland would renew its long lost place as our biggest (in profit terms) banking group.

Indeed, Bank of Ireland has been moving in this direction for some time. And its strong recovery over the past five years has been impressive. In 1990/1, for example, its profits of £53.5 million were less than one third of the £185.8 million recorded by AIB. By sorting out its problematic US operation, it has come a long way since then.

AIB would want to exceed the pundits' expectations by a reasonable margin to avoid being accorded a "pedestrian" tag. Indeed, the interim results were fairly lacklustre. The bank announced a 9.5 per cent rise in pre tax profit to £177 million in the first half. This, however, was attributed to lower bad debt provisions and stronger lending.

A look behind the figures shows very little underlying growth. The £15.4 million rise in profits came mainly from a £14.9 million cut in bad debt provisions. Excluding this indicates an underlying growth of a meagre 1.1 per cent.

AIB, of course, has had to contend with the weakness of the dollar and sterling, which would have depressed profit growth when the US and British profits are translated into the Irish currency. However, this is reckoned to have added just between 2 per cent and 3 per cent. So there was little underlying growth in real terms.

Bank of Ireland's interim results, to the end of September 1995, in contrast, have been impressive. It reported a 14.6 per cent rise in pre tax profit to £191.8 million and that was after a rise in bad debts. It was already ahead of AlB at the half way stage. So it has not that far to go to surpass AIB in a full 12 months period.

Most banks have been benefiting from a reduction in bad debts. However, this trend must now be coming to an end. AIB itself has admitted that at 0.4 per cent of average loans, bad debt provisions are at the floor. So growth will have to come from elsewhere.

While Bank of Ireland is poised to take the lead in profits, it is much smaller than AIB in terms of resources. Its total assets amount to £19.76 billion, compared to AIB's £21.8 billion. Also, its equity market capitalisation at £2.1 billion is £260 million less than AIB's.

But Bank of Ireland is more profitable. At the half way stage, it got a return of 26.4 per cent on shareholders' funds, compared with 18.9 per cent by AIB. It also squeezes more from its assets, 0.97 percent against 0.81 per cent,

This reflects Bank of Ireland's greater concentration on the more profitable domestic market. No specific comparative profit figures are available for the domestic market. Bank of Ireland, however, is the larger domestic bank. This can be deduced from the much higher tax paid on its operations in the Republic.

With the downward trend in bad debts coming to an end, and with intense competition ensuring that margins will remain under pressure in traditional banking, AIB, and the other banks, are strongly marketing a big array of new products. Having such a diverse choice can be good for the consumer. Obviously, consumers should only accept products that they need.

But importantly, consumers should not be pressurised into taking them, particularly if the bank customers are arranging banking facilities at the same time.