BRITISH-OWNED Bank of Scotland (Ireland) has signalled to the Government that it wants to be part of the so-called “third force” in banking in a possible merger with Permanent TSB, Irish Nationwide and EBS building society.
Bank of Scotland (Ireland) (BoSI) has tentatively raised the option of forming a core part of the larger group in talks with Department of Finance officials, according to informed sources.
No formal discussions have taken place but the idea has been favourably received by officials.
The bank is understood to be eager to push the matter further in the coming months as the Government turns its focus to consolidation across the banking sector following the setting up of Nama.
Plans for a merger of the country’s three smallest financial institutions have moved up the Government’s agenda as Nama starts buying bad loans from the lenders.
The enlarged bank is expected to require a large State investment with the taxpayer taking a stake.
The Central Bank has said that Nama will be a catalyst for consolidation across the sector.
Bank of Scotland (Ireland) had no comment to make yesterday.
The bank believes that its proposals would ease EU concerns about competition in the sector following the series of Government supports to the domestic banks.
The exploratory talks are being driven by local management at the bank with the support of its UK parent bank, the part-nationalised Lloyds Banking Group.
BoSI believes it could take a 20 per cent stake in the enlarged bank as a means of increasing the value of the Irish subsidiary for Lloyds or of paving the way for possible exit of the UK bank from the Irish market over a longer period.
The Irish bank postponed the outcome of an internal review last July pending a decision on the sale of assets by Lloyds in order to satisfy EU state aid rules on the UK government’s £15 billion (€17.1 billion) capital investment.
The delay on the outcome of the review, which had considered the closure of the Halifax retail branches in Ireland, has allowed the Irish bank to explore its involvement in the larger merger.
Sources said the bank believes the “third force” should not just focus on the mortgage or retail market but should include business banking in its operations to compete with the country’s two main banks, Bank of Ireland and Allied Irish Banks (AIB).
BoSI believes it could merge with the other lenders following the transfer of development loans from Irish Nationwide and EBS to Nama, the State “bad bank”.
The enlarged bank would have about 44 per cent share of the mortgage market. However, BoSI believes the third force should be a full service bank providing loans to small and medium-sized enterprises (SMEs) as well as mortgages and personal loans.
The bank has a tradition of business lending after buying the former State-owned corporate lender ICC in 2001. It has a 10 per cent share of the the SME market.
Permanent TSB and EBS focus on personal and mortgage lending, while an estimated €7 billion of commercial loans, which are largely property-related, within Irish Nationwide’s €10 billion loan book are expected to be transferred to Nama leaving €3 billion in home loans at the society.
Any merger would lead to substantial job losses across the sector, but would establish a viable rival to Bank of Ireland and AIB.
About a third of BoSI’s €32 billion loan book is to business.
A third of the bank’s loans are to development and property.
BoSI will shrink substantially as it moves portfolios of risky loans into the UK’s asset protection scheme, the British alternative to Nama which allows banks to take losses on bad assets over time.
Up to €20 billion of BoSI’s loans will be managed under the scheme, which will reduce the bank substantially, paving the way for the creation of the enlarged group through a merger with the three smallest Irish lenders.
