The Bank of Ireland is believed to be considering a merger with a large UK bank, the Alliance & Leicester, which could create a new banking force on both sides of the Irish Sea.
The merger, if it goes ahead, would transform the outlook for the Bank of Ireland, Ireland's second largest banking group. It would change from being an Irish bank with interests in the United Kingdom to being part of a major Irish/UK banking group, with a current combined market value of some £13.6 billion.
The Bank of Ireland has made clear its interest in expanding in the UK market, but the move to merge with a bank the size of the Alliance & Leicester (A&L) comes as a surprise.
However, this morning's Financial Times reports that merger talks with the Alliance & Leicester are advanced. A spokesman for the Bank of Ireland would make no comment last night. But it is understood that senior bank officials have spent considerable time in the UK in recent weeks and sources believe that talks with A&L have been progressing although a successful outcome cannot be guaranteed.
A&L is slightly smaller than the Bank of Ireland. It was valued yesterday on the market at £6.1 billion sterling compared to £7.5 billion sterling for Bank of Ireland. The A&L was formerly a mutually owned building society which floated on the market a couple of years ago.
Its strength lies in the mortgage and savings market, which would fit in with the market sector served by Bank of Ireland's existing UK subsidiary, Bristol & West.
Bank of Ireland has made no secret of its intention to target the British market and chief executive Mr Maurice Keane said at the presentation of its results last week that it would be the logical place for the bank to now look for expansion.
At that time Mr Keane said the bank was looking for synergies with its Bristol & West subsidiary.
"Diversity of earnings is something that appeals to us," he said.
At the moment it remains heavily reliant on the Irish market, which has delivered strong profits in recent years, but where economic growth is expected to slow in the years ahead.
The Bank of Ireland made a major move into the UK market in 1996 with the Bristol & West purchase, a move that has proved highly profitable.
Recently it had been speculated that it might target the Bradford & Bingley building society in the UK.
Alliance & Leicester demutualised in 1997 and has around 320 branches in the UK, with around 9,000 employees. Its traditional business is in the savings and mortgage market, but since demutualisation it has expanded into wider services such as credit cards, checking accounts and commercial services. It has some £20 billion in customer deposits.
Alliance & Leicester made a pre-tax profit of £455 million sterling in 1998, up 15 per cent on its 1997 figure of £395 million sterling. Earnings per share were up 22 per cent, at 54.6p.
Bristol & West has 150 branches and customer deposits of £8.7 billion sterling, with advances of £11.6 billion.
The precise structure of the likely deal between the two banks is not clear. Bank of Ireland is sitting on enormous surplus capital - with well over £800 million at its disposal - and would be well placed to raise further funds.
At its recent annual results, Mr Keane said that it would be difficult to justify sitting on surplus cash in the long term. However, last night's reports suggested that the link-up with Alliance & Leicester might be managed as a merger between the two organisations to create one larger group.
Bank of Ireland recently reported strong results for the year to last March, with pre-tax profits up 24 per cent to £831 million, boosted by the proceeds of the sale of its US Citizens operations. Following the results, investors have been speculating on the bank's next move.
In the Irish market is it seen as a likely bidder for ICC Bank.
