Bank of Scotland move could force rivals to act

THE aggressive move by Bank of Scotland, Ireland (BOSI) for dominance of the Irish business banking market is expected to force the AIB and Bank of Ireland to pay more interest on current accounts, according to some Irish brokers.

However, none of the major stockbroking houses, two of which are owned by AIB and BoI, believe BOSI’s plan to pay near ECB rates of interest on current accounts and cut overdraft rates by a fifth, will have any serious impact on bank earnings this year.

Goodbody Stockbrokers, 100% owned by AIB, said the move by BOSI was expected. They said that having successfully shaken up the mortgage market with aggressive marketing back in 1999, BOSI is attempting to replicate this success “While recognising that this initiative is an obvious negative for domestic margins we would highlight several important points here.

“Firstly, as a subsidiary of HBOS, BOSI has a powerful and well-capitalised parent behind it and can therefore afford to be highly aggressive in this space going forward. However, as a foreign bank with only a minor branch presence in the Republic, we would question BOSI’s ability to attract as many customers as intended, given the relationship-driven nature of business banking,” Goodbody’s banking analyst Len Riddell said.

Davy Stockbrokers, 100% owned by Bank of Ireland, said BOSI’s offering represents a cherry picking exercise and will not appeal to the mass market.

“As we learned with the mortgage market in 1999, a new entrant does not have to gain much market share to cause incumbents a problem,” Davy banking analyst Scott Rankin said.

“This time around, given the nature of the threat, we suspect the banks will try to avoid a competitive response across the board, while AIB and Bank of Ireland can point to recent initiatives to improve terms for customers,” he said.

Merrion Stockbrokers analysts Seamus Murphy and Elaine Brownlee said while this was an aggressive move by BOSI, they believed it was unlikely to be as successful as its moves in the mortgage market in 1999, when it forced a re-pricing of the market.

“This reflects the ‘stickiness’ of small business customers, with the banks offering a range of products and service options to SME’s However, this move will certainly be unwelcome at the margin,” they added, in a note to clients.

Dolmen Securities’ analyst Stuart Draper said the impact on the earnings of both AIB and Bank of Ireland is likely to be quite minor. However, in January, Dolmen reduced their forward Bank of Ireland eps forecast from 1.09 to 1.06 to take account of the anticipated increased competition from BOSI.