Scandals barely affect banks’ profits

MANY analysts are keeping faith with the country's two major banks recommending their shares to investors.

Consumers, including businesses and older users of the banks' services, may be forgiven for maintaining a more sceptical stand point.

But the cynicism goes way beyond those two segments of the banks' clientele.

If consumer trust in their banks was the criterion, the brokers would have a big "Sell" tag on the banks.

But one of the basic reasons they still have a "Buy" tag is the failure of the Irish duo to keep pace with valuations in Britain and the US for financial institutions.

Those disillusioned with the banking sector are unlikely to share the enthusiasm of the brokers: but if money matters more to you than principle, there is no reason not to buy the shares.

Both banks carry much lower share prices relative to their counterparts. Bank of Ireland has spent €500m trying to boost their share price through a share buy back. AIB has also indulged in this practice.

Giving both banks the thumbs up is not necessarily an endorsement of either in the broader strategic context. They are saying buying their shares at current prices looks like a good bet.

How much of that increase is directly attributable to the strategic direction of either is a moot point.

AIB is in the wars again, currently under investigation by the financial regulator over its systems failure on foreign exchange.

Up to €25 million is due to unsuspecting businesses over-charged on their transactions for a period of at least eight years. Looking back, AIB has been a catalogue of horror stories over the past 25 years.

It has to be rescued by the state after its ICI disaster. AIB insists the 2% levy imposed on all general insurance transactions was not attributable to them, but it is a perception that sticks. Its role in the debacle was less than honourable either way.

It either cajoled or intimidated the State into taking ICI off its hands for the sum total of a few euro (pounds at the time).

It took years to clear up that mess. Then it was outed as one of the biggest players in the DIRT scandal.

Its venture in the US, though fruitful initially, turned out to be a serious miscalculation. Despite protests to the contrary, AIB sold its majority stake while insisting to the last that selling was not an option. Before that, of course, it was done for €690m. The bank sold this debacle as a massive fraud when, in fact, the core of the issue was a systems failure in the US operations.

At the time it was reported that a piece of back-up technology costing $10,000 dollars would have significantly lessened the risk and John Rusnak might never have gotten away with the scam.

If there was fraud in the accepted sense of individuals making personal gains, it has yet to be proved.

Perhaps there was, but it is not really the issue here.

One of the disquieting things about AIB and, to a lesser degree, its duopoly partner, Bank of Ireland, is that ever since it embarked on expansion outside its domestic province it has been wracked by scandal or system failure after systems failure.

After AIB led the way in the US when it bought First Maryland, Bank of Ireland followed suit.

It was eventually forced to pull out of the US having learned a salutary lesson. More recently, the Abbey National debacle was further testimony that a new broom doesn't necessarily sweep that cleanly.

Rumour has it that it was a senior executives in the bank that leaked details of the talks to the British media to derail the merger because of fears that if a deal did go ahead, Bank of Ireland would have been in deep trouble.

Since that, apart from its link up with the British post office, Bank of Ireland has become pretty inactive.

AIB has been retrenching as well and the outlook for the two has become a lot more circumspect.

With their grip on the Irish market so strong it was perhaps inevitable that each was capable of making costly mistakes and still come up smelling of roses. AIB hardly blinked after the Rusnak affair and its profits came back pretty strongly in no time.

How many other, even well -run, corporations in Ireland could take a hit of that magnitude and survive virtually unscathed?

An effective monopoly, shared with Bank of Ireland, rather than strategic ingenuity, must, alas, be given the credit for that quick absorption of a €690m loss.

In the case of the Irish banking sector, experience has shown that monopolies are bad for the monopolists and the consumer.

Consumers get ripped off and the monopolists get sloppy, very sloppy.

The behaviour of the country's two major banks over the last 20 years suggests that unfortunately this is not an unreasonable point of view to take.