Irish suitor takes a punt

Opinions in London and Dublin were at odds last week, not over the peace process but as to the virtues of the Bank of Ireland's pounds 600m purchase of the Bristol & West Building Society. While the Irish press and analysts greeted the move with bells and whistles, some in London are sounding a more cautious note.

The deal made waves in Ireland not least because it is the third largest acquisition ever made by an Irish company. The Bank of Ireland is the country's largest mortgage lender with a 40 per cent share of the retail banking market.

Fuelled by the strength of the Irish economy, Bank of Ireland saw pre- tax profits climb to Irpounds 321m (pounds 314 last year) with earnings of 44.2p marking a strong recovery from the dark days of 1991 when profits crashed to Irpounds 31.8m and earnings were just 0.3p.

BOI appears to have been the only serious suitor for Bristol & West and bought it relatively cheaply. But was it cheaply enough? With 1.1 million borrowing and investing members and a network of 159 branches, Bristol & West has a lousy reputation, particularly since its disastrous foray into commercial property lending. Last year it came bottom in the performance league of 20 societies compiled by stockbroker UBS.

Bank of Ireland also comes to the deal with some blots on its escutcheon. The purchase of the First New Hampshire Bank in the US in 1988, just before a collapse in the local economy, proved an expensive move. BOI has now merged First New Hampshire with Citizens Bank, owned by the Royal Bank of Scotland, though it retains a 23.5 per cent stake.

"Bank of Ireland got buried by the US deal," says Shane Nolan, banking analyst at NCB stockbrokers in Dublin. "It has only just got over that."

With that experience still fresh, the Bank of Ireland's chief executive, Patrick Molloy, was last week keen to stress the comparatively low risk of acquiring a building society.

A share buy-back or acquisition had been expected at BOI for some time, given the amount of cash stuffed in its vaults. At the half year capital and reserves stood at nearly Irpounds 1.65bn (pounds 1.7bn) while its tier 1 capital adequacy ratio ahead of the B&W deal stands at a very healthy 8.2 per cent.

Not that the B&W acquisition is simply a means of dealing with the bank's embarrassment of riches. At present around three-quarters of BOI profits come from its Irish-based businesses, which include retail and merchant banking, a building society, stockbroking and asset management.

With limited opportunities for further growth in Ireland, the acquisition gets BOI out of the dilemma of how to diversify, says analyst Matthew Czepliewicz, at brokers Salomon Brothers.

The move gives the bank, which already has a Reading-based mortgage arm, a more respectable foothold in the UK market, building a total mortgage book of pounds 10bn. Bristol & West has a 1 per cent share in the UK mortgage market but particularly attractive to BOI is its strong presence in the South-west where its market share is around 7 per cent.

However, BOI is buying into a market where competition is set to intensify. A recent report from credit-rating agency Standard & Poor warns that in the low-inflation, low-interest rate environment competition between lenders will increase, forcing down margins.

Bank of Ireland could also be seen as taking a sizeable punt on sustained recovery in the UK housing market. Some analysts take a more bullish view, however. "From a shareholders point of view, BOI is buying Bristol & West at the end of the recession in the UK housing market," says Mr Nolan. "Its problem loans have already come to the surface, therefore it is buying it clean."

Martin Cross, banks analyst at brokers UBS, also rates the benefit to BOI even if the UK housing market fails to shine. "If Bristol & West profits don't go up, the deal still enhances BOI earnings, which limits the risk."

A boost to earnings of between 8 and 10 per cent is estimated once the full impact of the deal is felt from 1998 onwards. Analysts expect to see the benefit of combining the two mortgage businesses, offering BOI access to cheaper funding by drawing on B&W's deposit base, rather than the more expensive wholesale market.

BOI says it will look for further cost saving at B&W, although the building society has already tightened its cost/income ratio as part of its improving story, which last year saw profits rise 8 per cent to pounds 77m.

Bank of Ireland

Share price 468p

Prospective p/e 9

Prospective yield 3.1%

Year to 31 March

1993 1994 1995 1996

Pre-tax profits (Irpounds ) 121.2m 277.5m 321.8m 384.8m

Earnings p/share 12.8p 35.2p 44.2p 51.4p

Dividend p/share 9.2p 10.5p 12.5p 14.5p

Salomon Brothers forecast