Banking On Evasive Action


This morning the Irish Stock Exchange will give its verdict on a possible merger of Irish Life and Irish Permanent. It is virtually certain to endorse the discussions by increasing significantly the share price of both companies. Market analysts are agreed that the two companies would fit well together and that consequently the shares would have a higher value. So the merger, if it happens, will indisputably be in the interests of the shareholders but it will make little difference to the customers or the financial services sector. On the other hand, it might have unwelcome consequences for employees of both companies in the shape of redundancy notices. Cost-savings would be on offer, perhaps in sales, certainly in administration.

Despite the savings, there is little likelihood that customers will be offered products at a cheaper price; that is not what is driving the momentum of the discussions. Also, to speculate that the merged operation would become the much-awaited third force in banking - and give AIB and Bank of Ireland serious competition - is nonsense. The merged company would be strong on mortgages and life assurance. However, it would also be over-dependent on the Irish economy, relatively minuscule in branch banking and nowhere at all on corporate banking. The merger will, though, increase competition in the areas of mortgages and life assurance and that will be no bad thing.

A merger would suit both companies. Irish Life, by far the larger of the two, is, in effect, a one-product company. That was no harm in the days when financial services were heavily regulated and Irish Life's dominance was protected. But financial services today are much less regulated as to who can enter and who can sell what. Irish Life's assurance business, as with all market leaders, is under threat. Exponential growth has its limits; the company needs a link-up with a solid provider of another financial service if its expansionist ambitions are to be realised.

Irish Permanent is in much the same predicament. It is the largest provider of mortgages in the State but a minor force in financial services as a whole. It faces a long uphill battle endeavouring to reach the quantum size at which economies of scale start to kick in. And Irish Permanent doesn't have the time. The legislation will allow it to be taken over in a year's time, five years after de-mutualisation. Unless it can merge with something big, this time next year it will be on the way to being a wholly-owned subsidiary, probably of a UK bank or building society.

It will not be a merger in the strict sense - the Stock Exchange values Irish Life at double Irish Permanent. The talks might eventually get nowhere; failure to agree on board and management composition frustrates corporate tie-ups all the time. On the surface, the discussions deserve the support of the regulatory authorities. The combination of deregulation of financial services and the introduction of the single currency is certain to favour larger financial groups and both companies seem destined to be swallowed up by European giants unless they can take evasive action. The two coming together would keep the ownership in Irish hands. Moreover, a deal of their own choosing is preferable to a hostile takeover resulting, perhaps, in extensive redundancies.