Should the Bank of Scotland bid succeed then its stated intention is to sell various NatWest subsidiaries, including the highly profitable Ulster Bank operation in the Republic and Northern Ireland.
While market sources said that the Natwest saga has a long way to run and there is every likelihood of competing bids emerging, there is a strong likelihood that any successful bidder might also contemplate unloading some of the NatWest subsidiaries, with Ulster Bank probably top of any disposal list.
And any consolidation of the British banking sector will also focus attention on the two big Irish banks and where they might fit in to any such consolidation. Bank of Ireland has already tried to anticipate the expected consolidation with its abortive plans to merge with Alliance & Leicester and market sources believe that neither of the two big banks could remain aloof from any rationalisation in British banking.
As far as Ulster Bank is concerned, any prospective buyer would undoubtedly need deep pockets. With pre-tax profits last year of £155 million sterling (€229 million) and profits likely to top £170 million sterling (€265 million) in the current year, an established market position in both retail and corporate markets and an extensive branch network, analysts believe that Ulster Bank could fetch in excess £2 billion (€2.5 billion).
Top of the list of prospective buyers is Irish Life & Permanent, which has made no secret of its wish to expand its retail financial services operations by buying any retail operations that come on the market. Irish Life is unlikely to baulk at a £2 billion price tag for Ulster Bank, given that the addition of Ulster's 113 branches in the Republic would more than double the merged group's branch network and would also give Irish Life a presence in Northern Ireland where Ulster has 91 branches. It would also put Irish Life in a position to make a strong challenge to AIB and Bank of Ireland's current domination of the Irish banking market.
Irish Life chief executive Mr David Went held the same position in Ulster Bank until the early 1990's and knows the organisation intimately, as does Irish Life's chief operating officer Mr Brian McConnell, who is a former managing director of Ulster Investment Bank. Industry sources believe that both men would relish the prospect of taking over Ulster and using it mount a vigorous challenge to AIB and Bank of Ireland's dominant positions.
Industry sources also suggested that the Belgian bank Kredietbank is another possible bidder if Ulster Bank ever comes on the market. Kredietbank already operates corporate banking through Irish Intercontinental Bank and mortgages through Irish Life Finance and might be attracted by the prospect of extending its operations into retail banking through Ulster Bank, especially given the strength of the Irish economy
National Australia Bank has also stated in the past that it is committed to its National Irish Bank operations in Ireland, despite having its merger plan with TSB rejected and its recent difficulties with customer accounts in some of its branches.
If NAB is serious about staying in Ireland - and bidding for ICC shows a certain commitment - then banking sources believe that it has to increase its current 3 per cent market share. Ulster might be the ideal vehicle for such a move.
Industry sources believe that, while the strength of the Irish economy makes Ulster attractive to a European bank as an entree into the Irish market, it is more likely that existing players in the Irish market would be the bidders. "Ulster is an excellent operation but it's probably too small for a European bank to consider as a way into the Irish market. Bank of Ireland would be a better vehicle for any European banking group keen to get into Ireland," said one source.
While Ulster's position in the banking market in the Republic is the main attraction for any prospective buyer, industry sources said that the Ulster operations in Northern Ireland might hold fewer attractions, given the slower profit growth compared to the Republic and the weaker state of the local economy. Whether Bank of Scotland, if its bid for NatWest is successful, would consider splitting the Ulster operations between north and south for the purposes of a sale is not clear.
What is also not clear is the position of Ulster subsidiaries such as NCB Stockbrokers and Ulster Bank Investment Managers. Market sources believe that if Ulster is ultimately sold, then NCB would stay within NatWest's capital markets operations.
As for Bank of Scotland itself, banking sources in Ireland contrasted its move into the mortgage market and expressed interest in offering other financial products to Irish consumers with its proposal to sell Ulster if the NatWest bid succeeds. "I would have thought that Ulster would give them an ideal platform for a real move into the Irish market, so it's hard to see why they should sell Ulster."
