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Irish banks safe from takeovers? Back  
The relatively small size of the domestic Irish banking market could serve as a natural 'buffer zone' between Irish banks and international takeovers, writes Eamonn Hughes, in this analysis of a European banking sector in flux.
There have been two significant drivers of consolidation in the European bank sector. The commercial logic has been provided by (i) technological progress (which, combined with deregulation, has vastly increased competition levels), while the market logic has been supplied by (ii) the discipline of 'shareholder value'. The introduction of the euro has not necessarily been a key driver, but has acted as a catalyst for activity since its introduction.


Automation has provided significant benefits for the bank sector, which traditionally was highly labour-intensive. Nevertheless, the development of new, lower-cost, distribution channels has undermined the significant competitive advantage that the physical branch networks once afforded. Lower cost producers have secured a pricing advantage and the traditional banks have therefore had to sacrifice some of their margin in order to match this more aggressive pricing environment. In addition, the banks have also had to spend on providing the convenience of the new distribution channels, while also maintaining the older distribution systems. As a result of innovation, individual banks now have much more processing capacity than required. The technology that provides this capacity is increasingly expensive and seems to have an ever-shorter shelf life. Hence, it makes economic sense to spread the cost over as many transactions as possible.

Shareholder value

The development of an 'equity culture' in continental Europe in recent years has forced the management of banks to pay greater attention to the increasingly vociferous demands of their shareholders. The potential to cut costs offered by consolidation, and in particular by in-market consolidation, can be seen as a response to demands from shareholders for better returns. The recent merger announcement by Deutsche and Dresdner in Germany clearly plays to these demands.

Trends in Europe
Consolidation will undoubtedly continue across Europe in the years ahead, but is likely that the previous emphasis on cost cutting may be supplemented by deals to protect market share or link-up with technological partners.

In simple terms, the European banking market (circa 14,000 banks) still remains relatively fragmented when compared to the United States (circa 9,000 banks). In the US, the Top 5 banks control 50 per cent of the assets of the Top 50 banks. Looking across Europe, some markets have already seen large-scale consolidation, like the Netherlands, Portugal, the UK and Ireland. However, other markets still offer the prospect of further in-market consolidation, particularly Germany, France and Spain.

Going forward, consolidation is likely to incorporate a greater cross-border component, itself heralding a switch of strategic emphasis from cost-savings to the building and protection of core businesses. Meanwhile, continuing pressure on returns will force banks to focus ever more closely on such core activities. This will ultimately lead to a more rigorous process of de-consolidation of operations where no comparative advantage can be obtained.

Furthermore, new technology and the development of the internet are already starting to provide alternatives to in-market consolidation as a means of increasing market share and encouraging outsourcing and joint ventures. We expect these trends to become increasingly clear in the course of the coming year and the recent alliance between BBVA and Telefonica (the state telecoms company) in Spain may also provide a role model for future developments. In addition, the internet is impacting on the willingness of the banks to pay out large levels of goodwill for acquisitions.

Trends in Ireland

The Top 5 players in Ireland already control almost three-quarters of the Irish banking market, resulting in one of the highest levels of concentration across Europe. On this basis, further large-scale consolidation activity remains limited. However, a link-up between the large banks and some of the mid-cap players remains a possibility, since it is likely that the parties could side-step any competition issues now that the market has been expanded by new ‘physical’ and ‘virtual’ entrants. Also, the trend for banks in Europe to link-up with non-banks as the internet takes hold is unlikely to go unnoticed.

With share prices at half of last year's peak levels, many investors have been pondering on the vulnerability of the Irish banks to foreign predators. However, we believe that the relatively small size of the domestic market may provide a natural buffer for the Irish banks against takeover. In addition, the inability for a European player to take out costs to justify the likely premium required on one of the larger banks is also a deterrent. This naturally enough reduces the number of potential acquirers with overlap possibilities in the Irish market.

However, the internet does make it possible for new entrants to directly target customers in the Irish market. Nevertheless, in practical terms, any new virtual entrant is likely to require some brand recognition in the market. This could be achieved from extensive marketing spend. Alternatively, it could be acquired through the purchase of a small/medium-sized bank with a good brand franchise and bypassing the bigger players and the resultant large-scale goodwill implications. This is the preferred strategy for international expansion for some of the Scandinavian banks.

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