Banks should be doing better

This time last year the markets were buzzing with news of the latest Internet-related IPO and analysts and commentators debated whether the "old economy" companies would be able to compete with these new highflying "new economy" businesses.

In the financial sector, the established banks and insurance companies found themselves under intense pressure to respond to the perceived threat emanating from these new entrants.

During the first half of last year, many banks and insurance companies, both at home and abroad, set out their respective Internet technology strategies to the markets.

In some cases, plans were put in place to establish new standalone Internet banks; in others joint ventures were established to take advantage of the potential for cost saving and new product development apparently provided by the Internet.

This initial phase of euphoria regarding the potential offered by the Internet to financial institutions did not last long. The past three to six months have witnessed a dramatic scaling back from the majority of these initial investment plans.

Irish Life & Permanent, Eircom and Enba have announced that they are not proceeding with their three-way joint venture to develop Internet-based financial services.

Enba is an Internet based holding company based in Dublin that has focused on developing its Internet banking subsidiary, First-e.

Enba has not been immune from the cold winds blowing through the entire technology sector and the company has shed 70 staff at its Dublin office in recent months.

The week also witnessed the results from one of the pioneers of Internet banking. British Internet bank, Egg, announced full-year results that were in line with market expectations.

Revenues for 2000 more than quadrupled to £93.2 million although full-year pre-tax losses widened to £255.3 million sterling.

The company said that it was on track to break even in the 4th quarter of this year. Egg, which is majority owned by the UK insurer Prudential, said that at year-end it had 1.35 million customers and that it had added a further 100,000 customers so far this year.

Egg's shares floated at 160p last summer and have drifted down to their current level of 130p. The company initially gained new customers by offering very competitive, but loss-making, deposit accounts through the post and over the Internet.

The growth in new deposits has slowed dramatically recently leading many analysts to question whether Egg will be able to achieve and sustain a profitable business model in the long run.

Nevertheless, the management is pushing ahead with expansion plans and intends to grow outside the UK market within the next 12 months.

It is now clear that the eventual impact of the Internet on existing financial services business is going to take several years to unfold.

The initial dire predictions that low-cost Internet financial services would destroy the profit margins of the incumbent institutions now seem to be well wide of the mark.

Indeed it now looks as if the established players will have time to adapt to the new technologies. Increasingly, financial institutions are looking to the Internet to enable them to reduce their costs and to gain market share.

Despite the apparent removal of the Internet threat to their profitability, the share price performance of the Irish banks so far this year has been lacklustre.

European and UK banks have seen their share prices rise by an average of 5-7 per cent so far during 2001 compared with no change in the Irish financial sector.

With the Irish economy continuing to grow strongly Irish banks profits seem set to rise strongly again this year so that some recovery in share prices seems overdue.