Cost control and broader base vital to growth

A FEW more years of "fairly plain sailing" in the domestic market are what Bank of Ireland chief executive Mr Pat Molloy is looking forward to. However, despite favourable conditions in its main markets, the bank will have to work hard this year to generate earnings growth.

Pre tax profits should rise again, boosted by strong loan demand, deposit growth and growth in fee and commission income. But earnings per share - calculated on profits after tax - will come under pressure because the bank will no longer have the tax benefits of previous losses in the US. The loss of this benefit arises because of the rearrangement of its US operations.

Steps were taken to reposition the bank strategically last year. These include the merger of First New Hampshire in the US with the Citizens Financial Group subsidiary of the Royal Bank of Scotland. Bank of Ireland will have 23.5 per cent of the merged operation.

The other main strategic move was the agreement to acquire the British building society, Bristol & West, for £600 million.

Moves in the domestic market include spending to improve products and processes in branches and in subsidiaries such as Lifetime Assurance, and the planned addition of a full service direct banking operation.

With £286.4 million or 76.8 per cent of group profits generated in the Irish market, Bank of Ireland needed to move strategically to reduce its dependence on that market. While strong domestic growth in recent years has boosted profits significantly, its over dependence on its Irish market made it vulnerable to any downturn in domestic growth. At the same time, its small regional operation in the US was vulnerable in a market where banks are expanding rapidly.

With 23.5 per cent of a larger and more broadly based US bank, Bank of Ireland has broken out of a narrow market while maintaining a stream of US earnings with good growth prospects.

The British acquisition, which will not be completed until mid 1997, offers a steady profits stream from low risk mortgage business, the opportunity to sell bank products to the Bristol & West customer base and the potential to improve profits at the bank's existing British mortgage company. Margins at Bank of Ireland Mortgages in Britain have suffered because lending has been funded out of the wholesale money market.

In its retail market - branch operations in the domestic market, Northern Ireland and Britain - Bank of Ireland will have keep costs under control. Pre tax profits at this division rose 7.5 per cent to £182.9 million last year. However, while income rose by 5 per cent, costs rose by 5.5 per cent and profit growth was helped by lower bad debt provisions.

Through there were some apparent one off elements in the costs increase and some of the spending was aimed at improving products and processes, cost control will be important in ensuring continuing profit growth. This will be especially so with bad debt provisions at historically law levels.