Shareholders at Bank of Ireland will, no doubt, be well pleased with yesterday's interim profits. In the six months from March to September of this year, the bank generated profits of some £4 million a day. Overall profits soared by 102 per cent to £507 million, the highest in the history of the bank. To place this figure in context, it represents about half of the surplus in the Government's finances this year.
Even allowing for the once-off contribution from the sale of one of the bank's US operations, Bank of Ireland has delivered very handsome profits. The bank is entitled to see them as a vindication of its business strategy - a company criticised not so long ago for its somewhat outmoded image has been dramatically turned around. The bank has clearly benefited from the record level of growth in the economy; the sheer volume of business, especially in the corporate sector, has pushed profits to record levels. Despite these very positive results, there will be no shortage of begrudgers. Bank of Ireland may have emerged largely unscathed from the welter of scandal that has afflicted the banks this year, but public confidence in the entire sector has been eroded. The response of the banks to the recent round of interest rate cuts will not have bolstered public confidence; Central Bank rates may have declined by a cumulative 2.5 percentage points but only 1.5 percentage points have been passed on to the customers. In mitigation, the banks have made much of the very legitimate need to protect depositors, a not insignificant consideration, especially for thousands of deposit holders who have seen the value of their savings eroded by tumbling interest rates.
For all that, the banks appear to have taken the opportunity provided by the recent interest rate cuts to protect profit margins. In some areas - such as the mortgage market - these margins are under pressure due to intense competition. In other areas competition is less intense. For example, the continuing penal level of interest rate charges on overdraft facilities and some credit card accounts are indefensible. The advent of the euro, however, looks set to be a further spur to competition in the sector, which should lead to benefits for consumers.
The question now is how the Government might respond to the record profit levels delivered by the banks. There have been reports that it is considering proposals to introduce new taxes and levies on the financial institutions in an attempt to recoup some of the monies lost when corporation tax rates are reduced. It is to be hoped that the Government will follow through on these proposals. There is no need to impose an unfair obligation on the banks - this would only weaken them in terms of international competition. But there is no good reason why large and profitable institutions should benefit fully from a fall in the corporate tax rate to 12.5 per cent in the years ahead. Perhaps the banks might also consider participating in the public/private partnership investment programmes now under consideration, where private business will invest alongside the public sector in major infrastructure projects.
The banks must, of course, act in the interests of their shareholders. But they must also consider their wider responsibilities if they are to work to rebuild the public confidence damaged by recent revelations.