Share prices of banks that show growth strategies and credible Internet policies should recover, according to a review of the sector by Merrion stock brokers.
Banks with plausible Internet-based growth objectives will win out in a changing market, Merrion forecasts. But the brokers warn that traditional "bricks and mortar" banks will cede significant market share to new third-party banks if they do not have full online product offerings and compete on price.
The main Irish banks now have the technological infrastructure in place to roll out Internet banking and have linked their existing databases with their online customer interface.
While they are expected to increase their online product range this year, the brokers suggest the key challenge is minimising potential loss of income by ensuring rapid migration of customers to an in-house online bank.
"Bricks and mortar" banks are responding to the Internet threat with a mix of defensive and offensive strategies. But the market does not attribute incremental value to defensive offerings as "at best, they are focused on customer retention and cost savings rather than growth", according to Merrion.
Internet strategies announced by the Irish banks so far "are largely defensive", the brokers state. But they expect AIB and Bank of Ireland to target new customer bases offensively through alliances with third parties or direct Internet strategies. Merrion does not expect the Irish banks to take the mass market/ loss leader approach.
The profits of traditional banks are vulnerable to new Internet companies but banks with narrow commodity-type product lines and large retail customer bases will suffer most. More immune will be banks with large advisory-based products such as life assurance and pensions, such as Irish Life and Permanent, and relationship lending, such as Anglo Irish Bank.
The Internet offers significant opportunities to increase revenue through cross-selling and online brokerage fees as well as opportunities to reduce costs. But it is likely to result in lower margins, particularly on vulnerable product lines, though Merrion expects margin reduction to be gradual.
Merrion favours AIB over Bank of Ireland on the grounds that AIB appears "to be more aggressive at rolling out its Internet strategy in 2000, while the latter may continue to suffer from poor sentiment towards UK mortgage banks for several months". Stating that all Irish banks offer "good relative value" at current levels, Merrion says its preferences are for Irish Life and Permanent and Anglo Irish.
Traditional players who have benefited from taking an offensive Internet stand include BBVA and Bankinter in Spain and Prudential Egg in Britain.
