In recent years, margins in the banking industry have been falling steadily. But this does not seem to square with the rising profits reported by the sector, particularly the two big banks which have been recording profits of more than £2 million a day.

Bank of Ireland's half-year results, released yesterday, underline this point. The bank reported pre-tax profits of £507.2 million for the six months to the end of September. Profits increased by 34 per cent if once-off items are stripped out although the bank's net interest margin - or the difference between the interest charged on loans and the interest paid on deposits - shrank to 2.64 per cent from 3.35 per cent.

There are a number of reasons why the banks are continuing to grow their profits despite shrinking margins. In recent years, as the economy has boomed, banks have more than made up for margin losses through an increased volume of business. In essence, cheaper loans have led to more loans as borrowing across all categories - business, personal and mortgage - has risen strongly.

However, the banks also derive a significant amount of their profits from sources other than their Irish retail divisions. Overseas acquisitions are becoming an increasingly important source of profits for the two big banks, as yesterday's Bank of Ireland figures demonstrate.

The bank's acquisition of Bristol & West contributed 76.5 million to profits, accounting for 15 per cent of the total. AIB's Irish operations accounted for just 40 per cent of its overall profits last year as its US division - boosted by the £840 million acquisition of Dauphin Deposit Corporation in 1997 - assumed an increasingly important role in the bank's overall business.

The stock market rally of recent years has also seen treasury operations turn in strong performances while subsidiary operations in areas like life assurance and stockbroking have also benefited from the strength of the Irish economy.

All this has led many to ask why the banks do not return some of their profits to customers in the form of lower rates or charges?

Although bank managers like to style themselves as "friendly" and banks' advertising imagery relies heavily on concepts like helping people to fulfill their dreams, customers should not forget that banks really are in business for the money. Unlike building societies or credit unions, most of the big retail banks are publicly-quoted companies or subsidiaries of overseas plcs and their first duty is to shareholders. Both small shareholders and the larger institutions who invest in the banks would be less than happy to see their dividends eroded by pay-outs to customers.

The only way the banks will be forced to reduce their cut of the customer's business is through greater competition. This has already been seen in the mortgage market where fierce competition to secure new business has led to lower rates and charges across the market. The decision by EBS Building Society, the only committed mutual building society left in the Irish market, to return some of its profits to members in the form of lower lending rates, has added to the pressure for lower rates.

Other areas of the banks' business have not yet been subjected to the same winds of change, however. Credit charges, for example, remain very high although there are signs of growing competition in this area too with the arrival of US firm MBNA in the Irish market.

Meanwhile, local mutual institutions such as building societies and credit unions, without shareholders and under no pressure to maximise profits, should be able to give the banks a run for their money in the competition to attract both borrowers and depositors.