FRIDAY INTERVIEW:Jim Brown, chief executive, Ulster Bank
JIM BROWN says he was “quite disappointed” Ireland didn’t make it to the Rugby World Cup final to face his native rugby team, the All Blacks, but admits it saved him making the tricky decision of who to support.
The New Zealander has been in Dublin since April when he became chief executive of Ulster Bank, the third largest bank in Ireland, succeeding Cormac McCarthy. He was asked by his bosses at Royal Bank of Scotland, which is 83 per cent-owned by the British government, to take the reins at the group’s loss-making Irish bank.
Brown has spent his 30-year career in banking in Australasia and the Middle East. For most of that time, he was either building or restructuring troubled banks. This makes him a good candidate to run Ulster Bank.
Out of loans of £52 billion (€60 billion – RBS reports Ulster Bank figures in sterling), the bank has parked £15 billion of mostly troubled property loans in a non-core unit to be worked out over time. (RBS has categorised assets of £95 billion across the group as non-core.) The remaining £37 billion loans at Ulster bank are the core business – the good part that is the bank’s future.
RBS has taken provisions of £11.2 billion to cover losses on core and non-core loans. This amounts to about one in five of its loans.
Ulster Bank, like other banks in Ireland, has a major problem with property. Commercial property and development loans account for £18 billion of loans – or 35 per cent of all loans across core and non-core.
Add £22 billion of mortgages and this pushes the exposure to property to more than three-quarters of the overall loan book.
The scale of the property debts didn’t surprise Brown when he started in the job on April 11th. “I had been following what was going on here – it is a challenge, that’s for sure,” he said in his first interview since taking charge at Ulster Bank.
He was aware of the extent of the Irish banking crisis having read the various reports on the causes of the meltdown.
“I have been through quite a few of these issues in my career in different parts of Asia. In terms of the scale, obviously [with] the size of this market, this is a new experience for me,” he said.
Brown says that he has dealt with a mortgage crisis in Taiwan and consumer finance crises in Pakistan and the United Arab Emirates, and that his experience was a factor in the decision by RBS to ask him to relocate to Ireland.
The rapid growth in credit was a common theme in each of the countries he worked in, he said, and Ireland was no different.
“There are issues for Ulster Bank. Clearly, there are issues in the economy more broadly but I think there are significant opportunities for Ulster as well. It is challenging but there are opportunities. That is why I took the job.”
Brown has a clear strategy. He plans to reduce the size of the non-core portfolio which will take a long time – “probably more than three years, probably less than 10”.
He wants to continue to grow deposits so that the bank is funded “in country” and is not reliant on its parent company in Britain.
To that end, he wants to reduce the loan-to-deposit ratio (excluding the non-core part) to between 110 and 115 per cent by 2014 from 143 per cent at the end of June. (This compares with a target of 122.5 per cent by the end of 2013 for the State-backed banks.)
He hopes to do this and continue lending to 1.9 million customers as well as new customers. Ulster Bank gave out just under €500 million in new loans to small businesses in the first half of the year. The bank had business loans of £10.5 billion (€12 billion) across core and non-core parts in June.
Brown has spent the last six months travelling around the country visiting existing and potential customers. He cites the agriculture and food sector as the one offering the greatest potential, and gives examples of loan deals done with businesses in this area sector in Tipperary, Sligo and the North.
The bank is very much open for business, he said, despite the criticism from business lobby groups that banks are not lending.
“The key is getting the balance right – getting the non-core portfolio down over time,” he said. “It is going to take a long period of time. We are going to continue to focus on deposits in the market – that comes from serving our customers better. We are still out there lending to support the economy as well. It is getting the balance of those three right.”
The scale of the uphill journey was clear when Ulster Bank posted a first-half loss of £566 million. That only covered the core business.
The bank took a bad debt charge of £2.5 billion for the six months on core and non-core loans after further asset price falls. This amounted to 62 per cent of the charge for RBS overall, showing just what a problem the British bank has in the Irish market.
By the end of last year, RBS had pumped €7 billion into Ulster Bank to cover losses. Brown said it had provided further funds to cover the losses in the first half of the year but declined to disclose how much.
RBS sees Ulster Bank as a core part of its business because it is a 175-year-old bank that has been built up strong franchise north and south of the Border, he said.
“We have issues we have got to deal with in the short to medium term that we are dealing with. But the medium to longer term outlook for the bank is very good and the bank sees that,” he said.
Ulster Bank has agreed forbearance on 12,000 of its 170,000 residential mortgages, about 7 per cent of the book. “Coming up with individual options for individual borrowers is what is required,” said Brown.
He endorses the recent Keane report which proposed case-by-case solutions for mortgage holders in arrears.
“The key for us is to try to keep the borrower in their home if we can. We need to make sure that we are managing the book. It is trying to get that mix right,” he said.
Brown said Ulster Bank was refining its own forbearance products and exploring one or two options, including a product based around a split mortgage where different parts of the loan have different interest rates. But he declined to give any real specifics.
He also declined to speak specifically about his meeting last week with Central Bank head of financial regulation Matthew Elderfield, who has warned he will seek to cap variable mortgage rates if the banks exacerbate loan arrears by increasing the cost of mortgages.
Ulster Bank had to adjust loan interest rates to cover the higher cost of deposits to the bank, he said. “We need to price loans in the market at a competitive rate that delivers an acceptable return . . . We need to have a reasonable asset pricing that reflects the cost of funding to the business.”
Ulster Bank has been among the more aggressive mortgage lenders in raising rates, pushing its variable rate up by 0.6 of a percentage point to 4.95 per cent in July. No further increases are planned, he said.
He estimates that residential property prices have fallen between 50 and 55 per cent from peak, while commercial property has declined 60 and 65 per cent. It was “a bit hard to say when they will hit bottom”, he said, “but I don’t think it is too far away.”
Arrears and delinquencies are close to peaking too, he said.
Brown is using the expertise from the “global restructuring group” within the RBS group to deal with the big property loans in Ulster Bank’s non-core portfolio.
The bank has its own “mini-Nama”, he said, and was looking at options to handle the loans. Again, Brown was light on specifics.
Another work in process is the bank’s attempt to reduce its costs further. Ulster Bank was one of the first to tackle costs, reducing staff numbers by 1,000 in 2009. There are 6,000 staff in the bank in Ireland.
Brown said the bank was reviewing its operations and there may be further redundancies at the lender. “I wouldn’t rule job losses out but it is not something that we have formed a view on,” he said.
Ulster Bank declined to disclose Brown’s annual salary and he didn’t want to comment on whether the Government’s €500,000 pay cap would deter overseas talent from taking senior jobs in the Irish banking sector.
One issue Brown is happy to discuss, however, is the fact that Ulster Bank is, given its size in Ireland, the main rival to the “pillar” banks, Bank of Ireland and AIB.
“We are the competition. If you look at the market share of the bank, we are one of the significant players on both sides of the Border,” he said.
“We are a sizeable player so I do see that Ulster Bank has a clear role in supporting the island.”
ON THE RECORD
Position:Chief executive, Ulster Bank
Age: 50
Home: He is from New Zealand but most recently lived in Hong Kong for five years before relocating to Dublin in April.
Family: Married to Symone, he has three grown-up children.
Hobbies: Family, hiking and going to the gym.
Career: Started at Canterbury Savings Bank in Christchurch, New Zealand, in 1979. He later worked for Citibank in Taiwan and Australia before joining Dutch bank ABN Amro in Taiwan and other parts of Asia.
Before taking up his current job, Brown was chief executive of Royal Bank of Scotland's retail and commercial markets operations in Asia, a role that put him in charge of 7,000 people and operations in nine countries in Asia and the Middle East. He worked on the rebranding of ABN to RBS after the UK bank's takeover.
Something you might expect: Brown is a career banker.
Something that might surprise: Brown says he – and not his famous rock and roll namesake – is "the real James Brown".
