First National members will not lose out by agreeing to convert the mutual building society into a publicly quoted bank, group managing director Mr John Smyth insists.
Arguing that "competition drives market prices regardless of the status of the institution" he dismisses any notion that First National customers would face higher mortgage costs and receive lower returns on their savings after conversion because of pressure to grow profits and pay dividends to shareholders.
"For every list of tables that says mutuals offer the best prices I can give you one that says converted banks are best. Customers do business based on the value they are getting and will remain loyal as long as they get value. Our price competitiveness as a mutual will remain just as competitive as a publicly-quoted company. At the end of the day pressure on prices comes from competition in the market".
Mr Smyth rejects the argument that as a publicly quoted bank, First National would be under more pressure to increase profits every year and to increase dividend payments to shareholders.
"Contrary to what some people seem to think the members of a mutual are as interested in profits as anyone else. They want their company to be strong financially and to be able to grow and take advantage of opportunities in the market. And don't forget that members will constitute a large number of shareholders going forward."
Another advantage of the conversion is that it "will clearly define the issue of shareholders and customer depositors", he says. Because of the wide range of savings products offered, there is sometimes confusion around which savers are the owners of a mutual society. Some depositors think they rank among the owners whereas only savers who have share accounts have an ownership.
"All our customers will receive a broad range of competitively priced products and the owners of the business, the shareholders, will see the value of their business reflected in the share price."
With about 240,000 First National members due to vote on May 18th on the board's proposal to convert the society into a bank, Mr Smyth is adamant that this is the best way forward for the institution. He expects an "overwhelming majority" of the members who vote will favour the proposal and that once the other legal and regulatory hurdles are passed, flotation will take place later in the year, possibly in October.
Mr Smyth insists that First National needs to convert and float so that it can grow and develop. It needs access to capital for reinvestment. Profits from operations and other sources currently available "will not be enough at all to allow us to compete effectively in the years ahead". Asked why First National could not continue to increase profits and make acquisitions as a mutual, Mr Smyth says the issue is one of capital constraints.
"Mutuality has served us well. We have been very successful. But there are a number of constraints that mean capital for future growth is limited." First National has raised £75 million on the market through issuing Permanent Interest Bearing Shares, (PIB), to support its acquisitions in Britain. But Mr Smyth says the PIB market is very inconsistent. It cannot be accessed all the time and is not always available unlike the equity market."
Equity market funding is a more attractive and more costeffective source of capital than any of the alternatives, he insists. He wants capital so that he can drive the business organically and by acquisition. Organic growth will be based on developing and expanding product ranges and improving service delivery. There is expected to be much play on the society's new name First Active with opportunities for name play such as perhaps proActive, active management of funds. . . Acquisitions could be in the Irish or British markets but will be confined to the retail financial services sector. However, the ICC or ACC banks are unlikely to be on the First National shopping list ICC is outside its target market while there would be too much overlap with ACC's branch network. Another advantage of flotation would be that First National could use its own shares to make strategic acquisitions or partnerships. One possible early arrangement could be with Irish Life. First National currently sells Irish Life assurance policies as a tied agent of the life assurance company.
Reluctant to comment on a possible initial placing of 10 per cent of its shares with a chosen partner such as Irish Life as part of the flotation, Mr Smyth would only say that First National has an option to seek out a suitable strategic partner and offer that institution a stake of up to 10 per cent. First National "would see that going forward it would get a greater share of the manufacturing profits of the insurance products we offer to our customer base". That could be achieved through a joint venture with Irish Life. But a strategic partnership could be of interest to both companies since Irish Life has clearly set a target of developing into the wider financial services market.
Other constraints of mutuality include the 50:50 funding rule that funds raised on the wholesale market cannot be more than the amount raised through customer deposits and restrictions on the treasury operations. The funding rule "will become an issue in running our business. It could be a serious impediment to growth".
And flotation would allow First National to expand and develop its treasury operation freed from the constraints imposed by mutuality, he says.
The share options for executive directors in a flotation that can generate significant sums for them are sometimes an emotive issue. Such schemes are standard practice for public companies and First National's scheme is in line with the guidelines issued by the Irish Association of Investment Managers with strict performance targets, he says. Mr Smyth approves in principle. "Option schemes encourage management to drive the business forward and that in turn encourages a satisfactory return for investors and shareholders."
In the wider financial services market Mr Smyth expects consolidation to follow the mergers and rationalisation taking place in the US and Europe. "It has been relatively slow here. But it would not be a surprise to see consolidation including possible alliances with European banks," he says.
But Mr Smyth is not a subscriber to the biggest is best theory. "If an institution chases a segment of the market, offers the right service and differentiates itself from the pack, it can be very successful. That is obvious from the Irish markets."
Differentiation is First National's strategy and Mr Smyth is proud of the award won by its UK operation last year against competition from much bigger players it was nominated the institution with the most flexible mortgage product. In coming months First National plans to launch new products in the mortgage, savings and personal lending markets using this differentiation strategy. The key is to make products easy to understand, he explains.
Following measures implemented as a result of the Bacon report on the property market, which he praises as "well rounded and well thought out", Mr Smyth feels that property prices will come down and first-time buyers will be able to get back into the market.
On the recent controversy surrounding overcharging by banks, Mr Smyth comments that "anything that causes unease among customers about the financial services industry we can do without. What has happened is an unfortunate episode in the history of the industry in Ireland". Mr Smyth began his working life in auctioneering. He started work with St Andrews Auctioneers in Dublin in 1969 before moving on to Morrissey's. In his auctioneering job he was constantly asking potential house buyers where they were getting their finance. The answer was invariably one of the building societies because "the banks had no profile in the home loan market then". He began to think that a building society would be a good place to work and would offer good career prospects and in 1972 he joined First National.
"I became 50 per cent of the home loan side of the building society working in the Grafton street branch. That was back in 1972, so it shows how much we have grown since".
