Third banking force may finally become a reality

If all the talk recently about a third banking force has given you a sense of deja vu, it’s because the proposal has been knocking about for more than 20 years.

The Fianna Fáil and Labour Programme for a Partnership Government 1993-1997 stated that the coalition would "develop a vigorous third banking force from within the State sector by merging the ICC Bank and ACC Bank, and by seeking a merger of the new entity with the Trustee Savings Banks".

"The possibility of involvement with a major international bank will be examined in accordance with the new bank's needs," the document added. That government collapsed mid-term but the rainbow coalition (Fine Gael, Labour and Democratic Left) that followed also took up the policy initiative.

This proposal never saw the light of day. ICC was sold to Bank of Scotland, which has since quit the market, ACC was sold to Rabobank and is in the process of being wound down, while TSB was acquired by Irish Permanent under the umbrella of the old Irish Life & Permanent.

Ironically, this business ended up in State control after the financial crash in 2008. Permanent TSB as we know it today is 99.2 per cent owned by taxpayers.

Earlier this month, Minister for Finance Michael Noonan revived the idea of a third banking force to challenge the dominance of AIB and Bank of Ireland.

In an interview with RTÉ radio, he said: "I'm sending a signal out to the European banking system that a growing economy in Ireland has space for more banking activity and we would welcome them participating in Ireland by way of subsidiaries or by way of going into partnerships with some of our domestic banks.

“I don’t have a fully formed plan for a third banking force. That’s not the point. I’m signalling now in advance of the need . . . for that kind of service and I’m hoping that will be taken up.”

His comments came just days after Royal Bank of Scotland told investors it was still considering its strategic options for Ulster Bank in the Republic, while the Northern Ireland business would be more closely integrated with RBS's franchises in Britain.

Ulster Bank is the number three player behind AIB and Bank of Ireland and the Government does not want it to quit the market or downsize to a level that would make it a non-entity.

It is in this light that Noonan’s comments should be interpreted. No plan has been formulated but Noonan was making it clear the Government is open to a deal with Ulster.

In an interview with this newspaper last week, Ulster Bank's chief executive Jim Brown said Morgan Stanley had been hired by RBS to look at potential consolidation plays for Ulster Bank. This could be a merger or acquisition or some form of joint venture. But he also insisted it has a viable strategy to grow the bank organically if this comes to nought.

Many in the industry here believe the only reason RBS hasn't already exited this market – it has dropped more than £15 billion here since 2008 – is because the UK Government is its majority shareholder and David Cameron doesn't want to damage Anglo-Irish relations.

Brown declined to identify potential targets but Danske Bank, KBC, Bank Ireland and Permanent TSB have been namechecked.

Danske is quitting retail banking here and trying to migrate its 100,000 customers to other financial providers. It won’t be reversing this strategy.

However, there might be possibility of white-labelling its technology platform to Ulster Bank, as it has done with certain credit unions here. This might make sense given that technology is a huge financial drain on banks

– the Single Euro Payments Area transition cost Ulster Bank £18 million last year.

KBC has the financial resources to acquire or merge with Ulster Bank. The Belgian bank is trying to grow here organically by offering current accounts and opening new branches so a deal with Ulster might be a runner.

Permo is the most interesting of the three. The bank is 99.2 per cent owned by the State and is weighed down by hefty mortgage arrears and a gross €14 billion book of tracker mortgages that is losing money.

In terms of assets, Permo will probably be bigger than the slimmed down Ulster Bank in the Republic but unlike its rival it has no exposure to SMEs. They could be a good fit and they flirted with each other in the past.

It seems Permo chief executive Jeremy Masding and his colleagues are in the dark about any deal with Ulster Bank or participation in a third banking force. But it will take direction from the Government.

An Ulster Bank-Permo merger throws up a lot of questions. What stakes would the Government and RBS hold? Would there be private equity investment? How would they deal with the enormous loss-making tracker books ? Would the European Commission allow the Government to hold a major stake in a third banking force given its 14 per cent holding in Bank of Ireland and 99.8 per cent in AIB?

The EU might allow it to proceed, particularly if there is private equity involvement and a clear path to profitability and full privatisation within a set timeframe.

It might not be what was envisaged by Albert Reynolds and Dick Spring in 1993 but the long-mooted third banking force might finally become a reality. Otherwise, we'll just have to learn to love AIB and Bank of Ireland.