Move on Irish corporate sector will hit 'big two' hard

NEWS that Bank of Scotland (Ireland) is to go after the corporate cheque book business in the Irish market could cost the two big banks a combined €60m in lost profits.

For a number of reasons the news of a fresh challenge to the hegemony of the two big banks was particularly tough on Bank of Ireland.

Davy Stockbrokers is owned by the bank. We presume they did the bank the courtesy of letting them know the bad news before it hit the markets on Thursday with their analysis.

In fact the news is a double blow market sources suggest BoI has been losing out in this market sector and that Bank of Scotland (Ireland) is now fairly close to it in terms of market share at 18./5%.

BoI is probably at about 20% of the corporate business current account market with AIB controlling a commanding 27%.

It is believed BoI has been concerned for some time that it has been losing its grip on this market segment and the Scottish bank's decision to attack this end of the market will hardly cheer it up at this stage.

HBOS, Halifax Bank of Scotland, is a pretty formidable banking force in the UK.

Even if you add the two Irish banks together and then double that, HBOS is still way bigger than the exaggerated fire power of the two big Irish banks, which must be a cause of concern to both of them.

The Scottish banking subsidiary has all the necessary distribution to ensure blanket cover of the Irish market with a clearing bank and a nationwide distribution network signed on to take on the other two big players.

Davy Stockbrokers broke the news in an equity note on the banks and its contents simply says the two banks look like they will be considerably worse off once Bank of Scotland take on the corporate sector as outlined.

Davy's Scott Rankin who published the news that Bank of Scotland's assault on the mortgage market in 1999 cost the big banks about €20m each or 2% of their profits.

At the time share prices got hit as well as all of the major players in the Irish home loan market were forced to cut their rates in line with the Scottish bank.

Ironically the overseas invader did not carve up the market as many feared, but it forced the others to react defensively in order to limit the risk of losing further chunks of market share to the Scottish group.

To the Irish bank's credit they stood up to the competition, which resulted in them cutting mortgage interest rates by 1% at a significant cost as we have already said.

As a result of that initiative Irish home buyers have Bank of Scotland to thank for a collective saving of about €40 per annum on their mortgage repayments.

There was a double irony in this happening at the time. For years the local players insisted margins in the sector were as thin as was financially tolerable from a commercial point of view.

Who said competition doesn't work?

For certain the market looks like it is heading for one of the biggest upheavals ever.

Mark Duffy of Bank of Scotland (Ireland) can't wait to get stuck in and he probably sees this as his big chance to impress the hell out of the big bosses back in HBOS.

If past experience is anything to go by then the banks will be forced to make current account banking much more attractive to corporate customers than heretofore.

The Scottish boys are keeping their powder dry, but there seems little doubt at this stage that they intend doing whatever it takes to crack the market open in the years ahead.

As a result the Irish financial services sector may be facing its first real period of transition for sometime. It looks like the market will have to undergo a further bout of basic change in the operating environment.