The board of NatWest is set to decide on Thursday evening on a proposal to wind down Ulster Bank in the Republic after more than 160 years in the market, setting the stage for a likely break-up of the lender's €20.5 billion loan book, according to sources.
An announcement is scheduled to be made on Friday morning as the UK group, formerly known as Royal Bank of Scotland (RBS), reports annual results, ending months of speculation since The Irish Times first reported last September that it was actively considering pulling out of the Irish market.
Wall Street investment bank Goldman Sachs, which has been advising NatWest on its strategic review into Ulster Bank's future, is currently engaged to varying degrees with a number of parties interested in elements of the loan book, including AIB, Permanent TSB and Irish non-bank lender Dilosk.
It is understood that there are a lot of moving parts even at this late stage and it remains unclear as to whether any of the discussions will be advanced enough for NatWest to refer to them on Friday. Representatives for NatWest, AIB, Permanent TSB and Dilosk declined to comment.
Overseas investment funds such as Cerberus and Lone Star, which have been among the most aggressive buyers of distressed loans in Ireland and Europe in recent years, are also known to be circling the Ulster Bank loan book.
Ulster Bank in the Republic has 2,800 employees, and while NatWest remains committed to Ulster Bank Northern Ireland, a number of its employees support the operation south of the Border.
Ulster Bank required a £15 billion (€17.3 billion) bailout from RBS during the financial crisis, the equivalent of a third of the £45 billion that British taxpayers pumped into the wider group in 2008. Since then, Ulster Bank's loan book has been shrunk by more than half as the lender sold off problem loans and borrowers repaid debt at a faster rate than taking on fresh credit.
Negative rates likely
While Ulster Bank has convinced the Central Bank of Ireland to allow it return €3.5 billion of surplus capital to NatWest in recent years, it is still being made to hold equity capital reserves equivalent to about 28 per cent of risk-weighted assets. That’s double what most banks, including NatWest, are targeting over the long term.
This has served to further suppress NatWest’s profit returns on the capital it has tied up in the Republic at a time when earnings are being squeezed amid low interest rates internationally and muted loan demand.
The near-term outlook for the sector has been further affected by Covid-19, which is expected to result in a spike of non-performing loans this year.
Ulster Bank 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. This makes its exit much more significant than any of the other overseas banks, including Bank of Scotland and Danske Bank, that exited the Irish retail banking market since the financial crash.
Dealing with Ulster Bank's €22 billion business and retail deposits book will also be a major challenge at a time when Irish lenders are holding excess customers' deposits and are being charged negative rates by the European Central Bank on surplus cash deposited with it.
The risk of the remaining banks in the market being swamped with unwanted Ulster Bank deposits will likely result in negative interest rates being charged more widely, according to industry sources.
Minister for Public Expenditure Michael McGrath told a Fianna Fáil parliamentary party meeting on Wednesday night that the Government was very active on the Ulster Bank issue, and had engaged with the NatWest chair and the Chancellor of the Exchequer in the UK. He said the Government was examining the impact on different scenarios that may emerge.
