Today could be a big one for Ulster Bank’s 2,800 workers in the Republic of Ireland, its 1.1 million customers, the Irish banking market and the economy in basic.
After months of speculation about the possible outcome of a tactical evaluation of Ulster Bank’s Republic of Ireland operations by its moms and dad NatWest, clearness might come on Friday.
That day NatWest is due to report its annual results for 2020 and the strong expectation is that it will offer an update on its intents.
How did all this start?
The first sign that Ulster Bank’s future in the Republic of Ireland was in doubt emerged in the Irish Times last September.
The report stated (and NatWest consequently confirmed) that the group had actually begun a strategic review of its operations in the south, however not the north.
Among the alternatives on the table, it was declared, was a total withdrawal from the marketplace here.
But other options were also to be probed, including a merger and obviously continuing to trade here as typical.
Ever Since, NatWest has actually remained pretty tight-lipped, sticking to the line that it continues to examine its technique “properly and responsibly” because of the impact of Covid-19 and the difficulties to the economy.
It also has said that if any changes are to be made, they will be undertaken with “complete consideration of any influence on clients, associates and shareholders in the very first circumstances.”
So why is NatWest examining Ulster Bank?
Basically due to the fact that it believes it is under-performing.
Royal Bank of Scotland got Ulster Bank in 2000 when it bought the then owner NatWest and initially it both fueled and benefited from the Celtic Tiger economy, becoming a considerable player in the property advancement boom of the noughties.
It likewise broadened, purchasing First Active in 2003.
However as boom relied on bust, so too did Ulster Bank’s fortunes, and its parent (underpinned by the British federal government) was consequently required to bail the lending institution out to the tune of ₤15 bn over a variety of years from when the banking crisis hit in 2008.
For the following six years, the bank had a hard time to advance in the market, weighed down by non-performing loans and the expense of restructuring and downsizing its balance sheet.
In 2014 it lastly made a profit once again, however even ever since the bank hasn’t had the ability to capitalise completely on the recuperating economy.
Ireland is a relatively little banking market and Ulster Bank is just a medium sized gamer in it.
It has actually likewise suffered, like all banks, from the low rates of interest environment, weak credit need sometimes and the requirements to hold much greater levels of capital than typical due to the legacy of the crash.
At 26%, its reserves ratio is two times what other loan providers need, tying up as much as EUR2bn in capital that could be used somewhere else throughout the NatWest group.
Include the expense of continuous bailout dividends to its parent (which rebranded as NatWest last year) and the price of handling the fallout of its own errors on concerns like tracker home loans and bad IT systems, and you quickly start to see why NatWest chose to run the guideline over it once again.
Hasn’t Ulster Bank reformed itself?
Yes, to an extent it has.
Pre-pandemic it had actually decreased the percentage of its loan book that is not carrying out to under 7%.
It has also taken costs out of its operations, announcing it was preparing to lower its workforce by 266 individuals last year.
It lost weight its branch network to 88 through the closure of 22 outlets around the country.
The lender has actually likewise made progress in relocating to a digital very first design, in spite of high-profile IT missteps, and has actually continued to effectively take advantage of the 20%of the small company market that it holds.
It has also aggressively targeted the mortgage market in the face of increased competition.
Despite all this however, its cost-income ratio stays high at 98.4%, well above that of the broader group’s 66.9%.
And running earnings have actually remained modest.
” Add in the likely long-lasting impact of the Covid-19 pandemic on families and services and it is clear that Ulster Bank continues to deal with obstacles.”
So how likely is it that Ulster Bank will unwind its operations in the Republic of Ireland then?
No one understands for sure and it is possible that on Friday NatWest will say it is going to keep the status quo.
It did this when prior to in 2014 when it (RBS then) hired Morgan Stanley to carry out a review, however ultimately chose to remain.
The group might also state on Friday that it has yet to conclude its review process, drawing out the misery further for staff.
However within the industry insiders believe the reality that NatWest has actually left the concern remain unanswered for so long now, is not a good sign of its future objectives.
The uncertainty has actually shown upsetting for personnel and clients alike, undoubtedly harmful company, and has also provoked criticism from political leaders.
What are the options for an exit?
It might attempt and sell the entire operation as a going issue to another player.
However this seems unlikely given the issues detailed above with the business.
If NatWest can’t make a go of it, then how would another owner?
So if a choice is taken to exit, then the most likely scenario would be an orderly separate of the bank, with various parts offered to different organizations over a drawn-out period of a number of years.
It was reported in October that Cerberus was eyeing the whole EUR205 bn loan book, however Ulster Bank said at that phase no talks were happening.
Such a sale to a so-called “vulture fund” would be politically extremely controversial, even though borrowers’ conditions would in theory transfer with the loans.
Private equity firm Lone Star was likewise recently reported by Bloomberg to be lining up for a quote for some or all of business need to it go on the marketplace.
For all its faults, Ulster Bank does have attractive aspects, including EUR22 billion of deposits, the joint third largest mortgage book in the nation and a 20%share of the small business loaning market.
Although as one banking source put it last week, many would “run a mile” from the deposits offered the unfavorable rates environment and the expense of holding money.
What about a merger with another bank?
There has actually long been talk of the need for a 3rd pillar in Irish banking to rival the dominance of AIB and Bank of Ireland.
The natural components of this would be a combination of some or all of Ulster Bank, Permanent TSB (PTSB) and KBC Bank Ireland.
However it has actually never ever taken place and would require a considerable injection of funds in addition to political will in Long-term TSB’s case, provided it is 75%owned by the Federal government.
Last month the Irish Times reported that PTSB had actually retained Morgan Stanley to encourage it in relation to Ulster Bank, however only around a potential bid for the SME portfolio, which would be a good suitable for it.
On Thursday, KBC Bank Ireland president, Peter Roebben, told me he didn’t wish to hypothesize, that the bank’s focus was on its daily organization, that if something were to happen it would always take stock, however it is not in any official process whatsoever.
A relocation by AIB or Bank of Ireland to merge with Ulster Bank appears less most likely, but they plainly would be interested in looking at parts of the business, were it up for sale.
FSU is contacting the Minister for Finance to make a declaration on the possible PTSB and Ulster Bank loan book sale. A carve up of Ulster Bank is not acceptable and ought to be prevented at all expenses. https://t.co/3dCuO4eVxl pic.twitter.com/3fyig3HmbU
— Financial Provider Union (@fsuireland) January 29, 2021
How major would an Ulster Bank exit be?
Offered it has been around for 185 years, operating in the Republic considering that 1860 and is Ireland’s 3rd biggest bank, it clearly would be substantial.
For personnel, there would be the possibility of lots of or most losing their jobs over time, in a market where all the other Irish banks are likewise minimizing their workforces, something the Financial Services Union is very worried about.
Customers would likely see their loans sold to other lending institutions or funds and would need to move their current accounts to alternative banks.
They would likewise need to find a new home for their deposits, although a deal might be done by Ulster Bank with another bank on that front.
And branches in lots of towns around Ireland would definitely close.
In terms of the broader banking landscape, the market would lose another player at a time when it requires more competition, not less.
Given that the monetary crash lending institutions including Anglo Irish, Irish Nationwide, Bank of Scotland Ireland, Nationwide UK, Danske and Rabobank have all left the retail market for numerous reasons.
The Central Bank has stated the impacts would be felt most in SME loaning.
While on Tuesday Minister for Finance Paschal Donohoe stated the repercussions would be “really serious” for the economy, employment and credit.
Points he stated he has made straight to NatWest and to the British Federal Government which owns 62%of NatWest.
Friday may expose whether either took heed, or ultimately whether it will come down to a simple formula of business being service.