AIB entered into a binding agreement on Wednesday to buy Ulster Bank’s portfolio of performing tracker mortgages at an almost 5 per cent discount to the expected €5.7 billion size of the portfolio by the time the deal is completed.
Ulster Bank’s tracker portfolio, where borrowing costs are linked to the main European Central Bank (ECB) rate, stood at €6 billion at the end of March, weeks before its UK parent, NatWest Group, entered exclusive negotiations to sell the portfolio to AIB.
AIB will acquire the portfolio consisting of circa 47,000 Ulster Bank customers for a total consideration of €5.4 billion, equivalent to 95.2 per cent of par value, payable in cash funded from its existing resources. The discount factors in the low profitability of the portfolio.
“The exact consideration payable will depend on movements in the portfolio up to completion [in 2023],” AIB said, adding that it plans to hire a third-party service provider to manage the portfolio on its behalf, subject to the deal clearing necessary regulatory hurdles.
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“This servicing arrangement will have no impact on customers who will retain their existing terms and conditions.”
AIB, Permanent TSB and Bank of Ireland are planning to carve up the performing loan books of Ulster Bank and KBC Bank Ireland as the two overseas lenders retreat from the Republic, a market dogged by sub-par returns amid muted loan demand and high regulatory capital requirements in an era of ultra-low interest rates globally.
AIB has already agreed to buy Ulster Bank’s €4.2 billion corporate and commercial loan book as part of massive reshaping of the Irish banking landscape.
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While ECB officials have signalled that the bank is likely to move its deposit rate, currently at minus 0.5 per cent, back into positive territory by the end of September, in order to help rein in soaring inflation, it remains unclear when it will move on its main lending rate, which has been at zero since 2016. Tracker loans are linked to the main rate.
AIB, which is known to have faced competition from US investment powerhouse Pimco and London-based M & Investments for the Ulster Bank tracker mortgages, said that the transaction will start feeding into its earnings from next year.
The bank expects to generate about €90 million of total income from the portfolio on an annualised basis, it said.
The deal, together with the Ulster Bank corporate and commercial loans purchase, will reduce common equity Tier 1 capital ratio, a key measure of financial strength, by about 2 percentage points. AIB’s capital currently stands at 16.6 per cent of risk-weighted assets – well above its 13.5 per cent medium-term target.
“We are delighted to have reached agreement with NatWest and Ulster Bank on another loan book acquisition and look forward to welcoming these customers to AIB,” AIB chief executive Colin Hunt.
“This acquisition further adds to our growing balance sheet and progress towards our strategic targets.”
