Moving to meet increasing competition, Royal Bank of Scotland and Bank of Ireland said Thursday they are discussing a possible merger of their New England-based U.S. banking units.
The announcement came on the same day that Fleet Financial Group, Providence, R.I., completed its acquisition of Hartford, Conn.-based Shawmut National Corp., creating an $81 billion-asset behemoth in New England.
Royal Bank owns the $10.3 billion-asset Citizens Financial Group, Providence, while Bank of Ireland operates $4 billion-asset First NH Banks, Manchester, N.H.
Spokesmen for the two foreign banks declined to elaborate on their talks other than to say that the discussions "may or may not lead to a merger."
Speaking at a press conference in London, however, Royal Bank chief executive George Mathewson noted that both banks have strong positions in the states where they operate. He added that the combined bank would be better positioned to compete as the U.S. market becomes increasingly dominated by large banks.
A spokesman for Citizens in Providence estimated the bank holds around 34% of the retail deposits in Rhode Island and "strong" market share in Connecticut and the Boston area. Bank of Ireland's First NH, meanwhile, is by far the largest bank in New Hampshire.
Officials of Royal Bank in London said that in addition to gaining a broader network in New England, a merger could help reduce operating costs in areas such as back-office processing.
The announcement by the two banks follows disclosure by Britain's National Westminster Bank PLC that it was looking for a buyer for its own U.S. subsidiary, $32 billion asset-National Westminster Bancorp, based in Jersey City.
Citizens and First NH were acquired by their respective parent companies in 1988. Both subsequently ran into losses and had to be recapitalized by their parents in the late 1980s and early 1990s, but have since returned to profitability.
First NH recently reported a 50% jump in earnings to $32 million for its first half, which ended Sept. 30. Citizens on Thursday announced profits had increased 51%, to nearly $80 million for its fiscal year, which also ended Sept. 30.
Merging the two U.S. operations assumes Bank of Ireland will wind up with a minority stake of between 20% and 30% in the combined entity.
Analysts noted that although both banks have grown significantly through U.S. acquisitions during the last several years, they face strategic questions over what to do next.
"Our initial reaction is that a merger would make sense even if it's hard to say at this point what the cost savings might be," said Mike Trippit, a banking analyst with SBC Warburg in London. "Both banks face questions of how to grow their businesses in a market which is consolidating rapidly and where competition continues to become tougher."
Matthew Czepliewicz, a banking analyst with Salomon Brothers in London, said the merger makes sense because it could give Bank of Ireland an opportunity to "gracefully exit the U.S. market" while considerably strengthening Citizens' operations across New England.
Analysts said that while a merger of the two units offers a near-term solution for both banks, the question remains as to how the merged bank would increase market share.
Although a spokesman for Citizens ruled out any sale of the bank in the future, analysts speculated that Royal Bank might well make further acquisitions or even consider selling if it gets a high enough offer.
