The five-year ownership limitation is up for First Active, writes Barry O'Halloran

Getting through your first five years as a public-listed company would be a watershed in anybody's book but for one-time mutual First Active it's a very significant anniversary indeed.

It has survived a period of internal upheaval and market turmoil. More importantly, its fifth birthday as a plc meant a ban on any one shareholder owning more than 15 per cent of the bank was lifted. The ban was imposed due to its status as a former building society, and its end cuts the final link with First Active's former mutual status.

The ban's end means inevitable speculation about First Active's next step, or about who is a likely buyer or merger partner. Chief executive Mr Cormac McCarthy won't comment on any speculation but, earlier this week, he gave a speech to the Leinster Society of Chartered Accountants that clearly indicated his thinking on the issue.

"We believe we have demonstrated that independence is a genuinely viable strategy for our shareholders," he said.

And, while he agrees that First Active has reached a watershed of sorts, that's the position to which he returns regularly when talking about the future.

"I think, to a certain extent, it [the ending of the protection period\] removes a differentiating factor that was the cause of a lot of idle comment," he says. "But being the same as everybody else means that that is no longer there, that hidden thing that we [First Active\] are different, and when we become the same, a whole lot of things will happen. It's a normality position, which is great for the company. We can stand up and say we're surviving and thriving like any other company in the marketplace."

He argues that First Active has demonstrated that independence is a viable strategy by the progress the bank has made over the past three years and the competition it is providing in the marketplace.

There's no doubt that First Active has made progress. When Mr McCarthy took over as chief executive in July 2000, the markets regarded the bank as a bit of a dog. It had a lot of exposure to the Irish mortgage market, which was shaken up in late 1999 by the arrival of Bank of Scotland, forcing domestic institutions to cut retail rates.

As a smaller operator, First Active had to cut rates along with everybody else but was not big enough to absorb the impact of this. First-half profits for the year were almost halved, dropping to €15.1 million from €26 million.

It had ended talks with Anglo Irish Bank about a possible merger that would not breach the share ownership limitation. At the same time, it had an insurance business in the UK that was underperforming and some other elements that, with hindsight anyway, did not make much sense.

It was also in the middle of a restructuring that cut branch numbers by one-third to 50 and its workforce by 20 per cent.

Mr McCarthy decided to focus on mortgage lending, and savings and investments, and dump transaction banking and exit First Financial in the UK. Within six months, it had sold a 60 per cent stake in this business, cleared its DIRT liability and hired head of finance, Mr Michael Torpey, from Irish Life & Permanent.

The most important thing the bank did was make its numbers for 2000, a pre-tax profit return of €42 million.

Last year, First Active made a pre-tax profit of €66 million. It has €10 billion in assets on its balance sheet and a 12 per cent share of the Irish mortgage market. It has also paid €160 million in dividends to its shareholders, 75 per cent of whom are original members with small stakes.

Mr McCarthy stresses that the "core proposition is very viable" to all shareholders. So it isn't true that it also offers a viable proposition to a potential buyer?

"If people think that we are doing good things and have a great proposition, then that's great," he says. "Because compared to three or four years ago, people thought we were in the gutter and had no real relevance at all, so I consider that, if that's the view that's held, to be a success."

He says he's a firm believer in the capital markets and believes that the accountability they bring forced First Active to make the changes it needed to turn itself around. He also says he is conscious of his, and his board's, responsibility to deliver shareholder value, "but there are lots of ways of doing that", he argues.

Mr McCarthy's approach to this is to grow the business. First Active introduced a current account mortgage this year. "We've written over €100 million in business on this since we introduced it in January, which is huge for a complex product like this," he says.

A large proportion of these customers are people who have switched their mortgages from competing institutions.

First Active has been growing its commercial property business, which he says accounts for 15 per cent of its portfolio, and is earning a reasonably healthy 2 per cent margin. It has 2 per cent of the savings and investment market. Mr McCarthy wants to double this. The non-interest income generated by its current activities in this area is around 10-11 per cent, he points out.

He acknowledges that the savings end of the business was let go but says there is scope to recover it.

First Active has been running a television campaign around its investment products. It has about 400,000 savers, 200,000 of whom are active.

"We have put together a team of seven or eight life and investment consultants who are working our customer base with our branch managers to try and bring higher added-value products into the equation."

Going well is probably a fair assessment of the bank as a whole. But it will be interesting to see if it can keep going well on its own.