Ulster Bank, the third biggest lender in the State, is to be put into wind-down, marking the biggest development in the banking market since the height of the financial crisis.
The group’s parent, NatWest, said in a statement that it will begin a “phased withdrawal from the Republic of Ireland over the coming years that will be managed in an orderly and considered manner”. Ulster Bank Limited’s banking business in Northern Ireland is unaffected.
Taoiseach Micheál Martin said it was “not a good day for us in terms of banking”, but that the move is “reflective of the wider banking environment here and globally”.
He said Government’s objectives are to protect employees, customers “and also then to ensure competition in the banking sector”.
NatWest said it plans to sell about €4 billion of performing commercial loans to AIB and that it is in early talks with Permanent TSB (PTSB) and other strategic banking companies about their potential interest in buying “certain retail and SME assets, liabilities and operations”.
Sources said PTSB, in which the State owns a 75 per cent stake, is in talks to acquire most of Ulster Bank’s €14 billion mortgage book and about €700 million of small business loans in a deal that almost double the size of its assets.
A potential deal, which are at an early stage, would also involve PTSB taking over a portion of Ulster Bank’s €22 billion deposit book, employees and an amalgamation of the groups’ combined branch networks, they said.
Ulster Bank has 88 branches while PTSB has 76 locations, with the latter holding a greater footprint in the middle and southern parts of the State. Branch closures would be inevitable, and PTSB may need additional capital from the Government, depending on the size of a transaction that emerges from the discussions, which are likely to last months.
Phased withdrawal
“Following an extensive review and despite the progress that has been made, it has become clear Ulster Bank will not be able to generate sustainable long terms returns for our shareholders,” said NatWest chief executive Alison Rose in a statement. “As a result, we are to begin a phased withdrawal from the Republic of Ireland over the coming years which will be undertaken with careful consideration of the impact on customers and our colleagues.”
Ulster Bank, led by chief executive Jane Howard, has a net loan book of €20 billion and almost €22 billion of deposits, some 1.1 million personal and business customers and 88 branches. It has about a 15 per cent share of the mortgage market, 20 per cent of small business (SME) lending and a strong corporate banking business - making its exit much more significant than any of the other overseas banks that have retrenched from the State since the financial crisis.
The lender has about 2,800 employees. Ms Howard told staff in an internal announcement, seen by The Irish Times, that there will be “no compulsory departures from the business this year”
Group executives declined to say how long the process could take, what costs are estimated and how much of Ulster Bank capital could ultimately be returned to NatWest.
Ms Howard said that staff assigned to the loans it plans to sell to AIB will transfer with the portfolio. A deal could involve about 5,000 customers with over €2 million of annual revenues and the movement of between 250 and 300 staff to AIB, according to sources.
It would leave less than €1 billion of SME loans for PTSB, including credit extended by its Lombard asset finance business, resulting in lower scope than expected for that bank to use the Ulster Bank exit to ramp up its business in this area. This will fuel concerns that the bulk of the SME market will be left to just two banks: AIB and Bank of Ireland.
The prospect of PTSB acquiring a most of the €14 billion mortgage book, about half of this is made up of trackers, from Ulster Bank would leave it even more focused on home loans.
“In the short term, customers are also unaffected. Ulster Bank will continue to offer a full banking service in our branches, online and through normal channels for existing and new customers for the foreseeable future; most likely until 2022 at the earliest,” Ms Howard said. “Customers don’t need to take any action as a consequence of this announcement, and we’ll begin communicating with them over the coming weeks and months.”
High costs
The decision by NatWest brings to an end five months of speculation since The Irish Times reported last September that an exit from the market was under active consideration, as the challenge of turning around a business struggling with high costs and low profitability has become even greater as a result of the coronavirus crisis.
The big issue for NatWest has been the high level trapped capital tied up in Republic, which has been delivering little or no return for the UK group, which is majority owned by the UK government.
Minister for Finance Paschal Donohoe described the news as a “sad day” for Ulster Bank staff and the wider banking sector here.
“However, I welcome the reference made this morning to the two other Irish banks, PTSB and AIB, who are engaging with NatWest regarding the future of Ulster Bank’s SME, mortgage, retail and commercial loan books, as well as the current and deposit accounts held by the bank,” he said.
“While this is positive news and indicates the potential further development of already well established Irish banks, there is still much work to be done over the coming months.”
Established in 1836 as a conservative lender by a group of Belfast merchants, Ulster Bank’s linen trade customers continued to thrive even as the island was ravaged by the Famine a decade later. It went on to set up two offices in the Republic in 1860, before merging in 1917 with London County and Westminster Bank, a precursor to NatWest.
RBS, then under chief executive Fred Goodwin, inherited an exposure to the Celtic Tiger economy in 2000 as part of its takeover of NatWest, before doubling down three years later in Ireland through the purchase here of First Active. With caution thrown to the wind, the bank would bankroll some of the country’s largest developers, including Sean Dunne, and launch the State’s first 100 per cent mortgages.
Operating loss
Ulster Bank swung into a €255 million operating loss last year after setting aside €281 million of provisions to absorb losses from an expected spike in defaults as a result of the pandemic. It reported a €55 million profit for in 2019.
Its running costs amounted to 95.5 per cent of income, before loan loss charges, last year. This was little changed from the 97 per cent ratio for the previous year and almost double the 50 per cent level targeted by most banks internationally.
The plan to wind down Ulster Bank leaves large question marks over how the bank will be able to persuade depositors that do not move with transactions with other banks to move their money at a time when the wider banking system is grappling with too much customer savings.
Ulster Bank currently charges negative rates to businesses with more than €1 million on deposit, as the European Central Bank charges lenders up to minus 0.5 per cent for surplus funds placed with that organisation.
When asked about the prospect of Ulster Bank ultimately charging small depositors a negative rate, Ms Howard said: “As we sit here today, that’s not on the horizon.” A large portion of the deposits would be expected to move in any deal with PTSB.
