Bank of Ireland and its potential merger partner, Alliance & Leicester (A&L), are expected to go on a major campaign in an effort to persuade investors of the merits of the proposed alliance, once regulatory approval is granted.
Bank of Ireland shares ended the week down 4.6 per cent, suffering from weakness in the financial sector and doubts among fund managers about the merger. Reflecting the view that the deal is more beneficial for the British group, A&L shares have risen 6 per cent during the week.
While investors have raised questions, the bank has been precluded from commenting further because bank regulators on both sides of the Irish Sea are still working on how they will oversee the merged structure, before they approve the proposals. Bank of Ireland shares closed yesterday down 25 cents at €17.75.
A number of analysts have expressed doubts about the statement of the two banks that the merger will lead to cost savings and revenue enchancements of around £230 million (€300 million).
However, given that the two banks have spent some time working on the deal, they can be expected to fully detail the savings and expected revenue enhancements when they move to selling the deal publicly to the press and to institutional investors within the next few weeks. With many institutional investors adopting a wait and see approach to the deal, this process will be vital if Bank of Ireland is to win the necessary backing of its shareholders for the deal. Approval must be given by shareholders holding 75 per cent of its shares, if the deal is to go through.
A number of analysts have pointed to the tough British mortgage market and questioned the benefits for the Irish bank of entering this market.
Taking a more optimistic view, in a recent note on A&L, Morgan Stanley Dean Witter in London said it "has strong underlying fundamentals and an attractive valuation".
Written just before the merger was announced, Morgan Stanley said that A&L shares - then 902p sterling and now 915 1/2p - could rise to £11 sterling.
The brokers said that A&L's personal banking division and its commercial bank have both been strong performers. In personal banking, consumer credit is seen as a key area of growth potential. A&L has a market share of 2 per cent and is seen as having strong opportunities in a market rising at a 15 per cent annual rate.
Because it has successfully diversified, a "soft landing" for the UK economy will provide further growth opportunities, it says.
Pre-tax profits at A&L could reach £490 million this year, from £455 million last year. Volume growth and cost control are expected to lead to rising returns from the core mortgage business, despite pressure on margins.
