Domestic finance houses refuse to panic in face of brash new entrant

Irish banks and building societies have been quick to dismiss Bank of Scotland's aggressive entry on to their home turf as an opportunistic marketing stunt. "Where will its rate be in a year's time?" has been their mantra and, to be fair, it's the key question in the minds of anyone considering taking up the Bank of Scotland's mortgage offer. Despite its bravado, the retail financial sector recognises this is its first serious taste of new competition. If Bank of Scotland succeeds in making any serious inroads into their customer base, Irish mortgage lenders will have little option but to respond. No doubt they are already doing their sums to estimate how expensive it will be to take on the Scots.

For now they will be content to monitor just how much interest Bank of Scotland can generate in the Republic when its phone lines open for business on Monday. They will be watching closely to see how many of their customers are showing signs that they might move mortgages. The real threat will come from mortgage holders who will be coming out of fixed-rate products this year and will be searching around for other options. Also, anyone considering trading up will almost certainly be interested in the Bank of Scotland's 3.99 per cent standard variable rate, while it will also attract first-time buyers.

Indeed, anyone with a mortgage will have paid more than a cursory glance to the Bank of Scotland publicity this week. The 3.99 per cent rate offers savings of up to one percentage point on the cheapest variable rate already on offer here. It's a good move as far as consumers are concerned.

In the past couple of weeks, banks and building societies have reported a surge in the number of customers looking to fix their mortgage for various periods in a bid to protect themselves from future interest rate hikes.

An upward shift in rates is now widely expected possibly in the spring. And, while most analysts believe any increase in mortgage rates will be marginal, the next move in interest rates will decide just how competitive the Irish financial institutions have to be against their new Scottish rival.

ABN-Amro banking analyst, Mr Eamon Hughes, says it is still too early to assess the impact Bank of Scotland will have in the Republic but that the next rise in European interest rates will be crucial. "We will have to wait and see whether Bank of Scotland will move its rate and what the response from the Irish institutions will be."

Bank of Scotland claims it is able to sustain a variable mortgage rate which is close to one percentage point below the current market level here in the long term, because of its low-cost operations. If it can, domestic mortgage lenders will really feel the pressure.

Those in the front line of any defensive action will be AIB, Bank of Ireland, Irish Life & Permanent and the EBS Building Society. Irish residential mortgages account for 9 per cent of AIB and Bank of Ireland's loan book while 85 per cent of Irish Life & Permanent's book is made up of mortgages. The EBS, which has marketed itself very successfully on the basis that it offers the cheapest variable rate mortgage, will be anxious not to lose that particular claim to fame.

For the EBS which, as a mutually-owned building society, has limited access to fund its loan book in the major European capital markets, any tightening of margins on its mortgage book will bring pressure for reductions in its deposit rates.

Despite the higher profit margins enjoyed by Irish financial institutions compared with their European counterparts, any reduction in rates in response to competition will have a direct impact on the overall profitability of the entire sector.

The fixed-rate mortgage business is the most resilient in the short term, unless Bank of Scotland introduces a lower range of fixed offerings. But the variable interest rate element of the loan books of the various banks and building societies could become less profitable fairly quickly. ABN-Amro estimates that if AIB was to reduce its mortgage rates by a full percentage point this year, it would reduce the forecast group profits for 1999 by £30.4 million, or 2.7 per cent. A similar cut by Bank of Ireland would swallow some £39.8 million - or 4.4 per cent - of this year's profits. Irish Life & Permanent would proportionately suffer even more in this scenario, reducing its 1999 profits by £58.5 million, or a very significant 17.2 per cent.

Goodbody Stockbrokers financial analyst, Mr Oliver O'Shea believes Bank of Scotland is aiming to attract premium quality business. And, with significant discounts on offer, it could rapidly gain a material market share of new business assuming its mortgage application processes are as efficient as it claims.

It seems clear that the main Irish players in the mortgage market will be very reluctant to take on Bank of Scotland in the short term. In the longer term though, if Bank of Scotland manages to show it is serious about gaining a presence in the Irish market, Irish mortgage lenders will have little choice but to introduce more efficient ways of delivering cheaper products.