Royal Bank of Scotland to signal commitment to Ulster Bank

Royal Bank of Scotland is expected to signal on Friday that it intends to commit to its Irish division, Ulster Bank, in a bid to benefit from a recovery in the property market.

RBS chief executive Ross McEwan is likely to affirm his desire to stay in the Irish market and retain Ulster Bank, having previously explored the possibility of selling it or seeking outside investment.

Mr McEwan noted a fortnight ago that the Irish property market has “been going well”. He highlighted a 23 per cent rise in Dublin residential prices over the last 12 months as well as a general uplift in the commercial property market.

“We are seeing a path for Ireland and what we do with that business, which is positive,” he said, adding that his preference was “to hold on to that business”.

RBS is due to publish its third-quarter financial results on Friday, when it is on track to unveil its best performance since it had to be rescued by UK taxpayers in 2008.

The parent bank has provided more than £15 billion in capital to Ulster Bank over the past six years after the division suffered from heavy exposure to the collapse in the Republic’s property market.

Ulster Bank has lost more than £2.5 billion in the past two years alone but recorded small profits in the first two quarters of 2014. It is also on track to receive about £300 million from reversing loan impairments in the third quarter, the bank indicated recently.

RBS, which is about 80 per cent owned by the UK government, passed the European Central Bank’s stress tests, which were designed to assess whether banks had enough capital to weather another economic crash.

‘Pass mark’

The results of the tests, published yesterday, showed RBS would have a core capital ratio of 6.7 per cent at the end of 2016 under the hypothetical adverse scenario, while the Ulster Bank subsidiary would have core capital of 6.2 per cent. Both were above the 5.5 per cent “pass mark”.

"The positive outcome of the comprehensive assessment demonstrates the progress we have made over the last number of years," said Ulster Bank chief executive Jim Brown, who has overseen an accelerated disposal of the bank's nonperforming loans.

Ulster Bank added its capital position had strengthened considerably this year, reflecting both the reduction in its exposure to “legacy assets” and what it described as “a significant improvement” in its trading performance.

Its estimated core capital ratio as of September 30th stood at 17 per cent, up from 11.6 per cent at the end of 2013.

Industry sources had expected that RBS would be the British bank that fared weakest in the test. However, it ended up passing with a wider margin than its rival Lloyds, which would have a core capital of 6.2 per cent in the stress scenario.

RBS’s core capital ratio had risen to 10.1 per cent at the end of June, up from 8.6 per cent at the end of 2013.

KBC, the Belgian bank active in the Irish mortgage market during the property bubble, also passed the tests. Its core capital would be 8.3 per cent under the stress scenario.

"KBC comfortably meets these stringent solvency requirements," said group chief executive Johan Thijs, who described the outcome of the tests as "a reassuring signal to all stakeholders placing their trust in our institution".

Danske Bank Group, which retains a corporate banking presence in the Republic, would have a core capital ratio of 11.7 per cent in the stress scenario, while Dutch lender Rabobank passed with a core Tier 1 capital ratio of 8.35 per cent.

However, the ECB's health check may bring only a short period of relief to lenders in the euro zone, Rabobank Group chief financial officer Bert Bruggink said.

“This is seen by some as one stage on the road to a further tightening of capital demands,” he said. (Additional reporting: Reuters, Bloomberg)