Merger between AIB and Bank of Ireland now considered a credible proposition

AIB's current difficulties could present merger opportunities for rival Bank of Ireland, a notion that is now being talked about as a credible scenario, writes Siobhán Creaton, Finance Correspondent

Could the staff at Bank of Ireland and AIB be preparing to become colleagues in the not too distant future on foot of a merger between Ireland's two biggest banks?

Such a proposition would have been dismissed just a few years ago on the basis that the relationship between the Irish banks was already far too cosy and that customers never really benefited from true competition in the sector.

But a merger between Bank of Ireland and AIB is something that Bank of Ireland's new chief executive, Mr Michael Soden, is now publicly championing. And while he is mindful of some political resistance, the notion is gaining currency.

There is a degree of opportunism about the timing of this proposal, coming at a time when the credibility of AIB's management team is on the line and when, for the first time in a very long while, the bank looks vulnerable to a takeover.

Speaking to The Irish Times this week, AIB chairman, Mr Lochlann Quinn, was quite receptive to the notion and expressed the belief that politicians would embrace such a union if the public could be convinced of its merits.

"It's a big argument. The argument will be made that the customer would get destroyed. I can't see that that would be the case. Our bank charges and bank fees are controlled by the regulator. If I was on a pulpit I could argue both sides of the case quite strongly but I think it is a reasonable debate," he said.

"At the end of the day this decision would really have to be made on the basis of whether the Irish people believe this would be best for the Irish economy. I suspect the politicians will react to what the public pressure will be."

Sources close to the Minister for Finance, Mr McCreevy, signalled that he was unlikely to offer strong opposition if serious merger talks between the two banks got under way. But other politicians will be mindful of the massive job losses and branch closures that would be inevitable as a merged bank sought to reduce duplication. There is also likely to be strong reservations from customers on competition grounds but if Mr Soden's lobbying were effective, such a merger could ultimately get the green light.

The general secretary of the Irish Bank Officials Association Mr Larry Broderick says a merger between the State's two biggest banks would be the worst possible outcome.

"These banks have two very significant head offices in Dublin. There would be a huge overlap in terms of their branch networks and would result in huge job losses," he said.

The business sector appears to be open to listening to the various arguments for now, with the greatest concerns concentrated among small business customers. But the volume of opposition would intensify if the merger was being seriously progressed.

In an interview with The Irish Times last week, Mr Soden pitched his proposition as being the lesser of two evils for the Irish economy. He cites the weakness of the New Zealand economy in the years since indigenous banks fell into foreign ownership and suggests the Irish economy could face a similar fate unless domestic banks forged a defensive alliance now.

There is some merit in this view and from a political perspective the Government would be keen to retain a strong Irish banking sector. But it is questionable whether the merger would be anything other than a short-term solution.

Together AIB and Bank of Ireland would have a stock market value of close to €23 billion and would have a strong capital base to allow international growth and move up a notch in the global banking hierarchy.

Mr Soden's hope would be that an enlarged Irish bank would be "more indigestible" for a foreign predator.

But even at this size, a merged AIB and Bank of Ireland would be less than half the size of the likes of Royal Bank of Scotland and Lloyds TSB which could easily absorb a €23 billion acquisition if they were so minded.

The Competition Authority would have to examine the implications of a merger if it were advanced in a serious way. Some business sources suggest Mr Soden's grand plan is nothing more than Bank of Ireland taking the opportunity to advance its supremacy at a time when its nearest rival is in the wars. Events at AIB over the coming days and weeks, when it seeks fully to explain how a $691 million (€788 million) fraud went undetected for five years and who was responsible, will have some bearing on how much further Mr Soden's ambitions are advanced.

It remains to be seen whether Mr Soden has provoked a timely debate or whether Irish banks have run out of time in the rapidly consolidating world of banking.