Bank of Ireland's plan to axe 2,100 jobs at a time when it is set to make record profits of more than €1.3 billion may have angered its staff and unions, but it has been welcomed by financial markets as a necessary pre-emptive strike to position the bank to meet the challenges that lie ahead.

Banking analysts yesterday described the move as "encouraging" and welcomed the bank's initiative in tackling its cost base.

The general view was that, if Bank of Ireland didn't move to address its high costs, someone else would come in and do it for them with even more detrimental effects for the Irish economy.

"They are looking out to the strategic challenges that this business faces in four to five years' time," said one banking analyst. "They have to take out the costs now or they will get taken over and the costs will be taken out by someone else."

Faced with growing competition in its domestic market, the prospect of increased consolidation in the European banking sector and ongoing margin attrition, Bank of Ireland needs to become a leaner organisation, analysts believe.

They note that the cost/income ratio in Bank of Ireland's Irish retail operation stands at close to 60 per cent. Overall, the group has a cost/income ratio of 54 per cent, well above the 45 per cent level at Royal Bank of Scotland which, as owner of Ulster Bank and First Active, is one of its main rivals in the Irish market.

But if Bank of Ireland succeeds in delivering on its cost savings plan over the next four years, the ratio will come down to a much more competitive 47 per cent.

If successful, analysts believe the cost-cutting move could be worth between 70 and 80 cent to the share price.

However, investor reaction to yesterday's announcement was muted, with the stock closing three cent lower at €12.30.

The big question in the minds of many investors is whether the bank can deliver.

Although the nature of the job cuts was not detailed, pending consultation with staff, the bank must now navigate what seems set to be a lengthy and difficult negotiating process with the unions.

Analysts believe that the cost-cutting plans at Baggot Street could be just the start of a shake-up in the sector with similar moves to follow at the likes of AIB and Irish Life & Permanent.

According to Mr Seamus Murphy, analyst at Merrion Stockbrokers, the current cost-cutting plan may be just the first phase of a longer-term efficiency programme carried out not just by Bank of Ireland but by the other major domestic banks as well.