BUYING A BANK
Banking can be as competitive as any commercial enterprise. It is difficult and expensive to increase the size of a large bank in a small economy; more money can be spent in building up market share then the extra market share might deliver in revenue. And so, as in other industries, banks tend to look to overseas for growth potential.
Banks have been tempted in the past to look for growth by diversifying out of financial services. Moving into unrelated businesses seldom paid dividends however and sometimes, as with Bank of Ireland's shareholding in Fieldcrest Towels, it ended in disaster. Even in countries where banks invested in industry as a matter of course, such as Germany, the involvement didn't work and is now being unravelled. Prudent banking growth involves sticking to what you know and when you outgrow a market looking for purchasing possibilities elsewhere.
There have been few major acquisitions by Irish companies which are as perfect a fit as that announced last week by AIB. The proposed purchase of the Dauphin Deposit Corporation by AIB's US subsidiary, First Maryland Bancorp, for £840 million will make First Maryland the 45th largest bank in the United States and, more importantly, one of the three largest in its catchment area. In a stroke First Maryland will graduate from being just another regional bank to what is regarded as a "super regional".
The acquisition is not without risk. Other European banks have made major acquisitions in the US only to see them turn terribly wrong. The risks with Dauphin however are low. It has a strong market presence and while its consumer and commercial customers may be unspectacular they are solid. The purchase is relatively expensive. But US banks have flourished in recent years; bank shares on the stock market have risen by nearly two thirds in the last 18 months compared with a one third rise for the market as a whole. Dauphin has been tightly managed; the ratio of its costs to income is lower than AIB's. It will not be easy to increase profits significantly although AIB anticipates "rationalisation" savings of $48 million a year. Dauphin's 2,700 employees doubtless heard of the acquisition with mixed feelings.
The deal means that more than a third of AIB's assets will be in the US and, in time, perhaps as much as half the group profits will be earned there. Its anxiety to reduce its dependence on the Irish economy has been evident since it bought into First Maryland nearly 14 years ago. Similarly, Bank of Ireland established a major presence in Britain with last year's £600 million purchase of the Bristol & West building society. Neither group has shown much interest in expanding onto the Continent which, in most countries, is notoriously overbanked. And non EU interests are in vogue; EU banks stand to lose thousands of millions a year in foreign exchange transaction fees when the single currency starts up. Irish banks will lose at least £100 million.
The acquisition could not have come at a better time for AIB. The group's profitability and share price have been underperforming and, in both instances, have been overtaken by Bank of Ireland. The risk, of course, is that expanding its asset base and heightening bits profile means that AIB itself becomes a more attractive takeover target.