RBS says impaired loans at Ulster make up bulk of £91m loss

THE SCALE of impaired loans at Ulster Bank has soared since the start of the year and is the main cause of a £91 million operating loss at Royal Bank of Scotland's (RBS) Europe and Middle East banking division in the first quarter, according to figures published by the banking group yesterday.

Loan losses at Ulster Bank were responsible for the "bulk" of the £221 million in impairments in the division, which represented an increase of £180 million compared to the first quarter of 2008.

Impaired loans now account for 1.48 per cent of gross customer loans, up from 0.85 per cent in the full year of 2008.

Ulster Bank chief executive Cormac McCarthy said the accelerating rate of loan losses, which compares to impairments of £394 million at Ulster Bank for the full year of 2008, reflected the "unprecedented downturn" in the Irish economy.

"Market conditions are difficult and, we expect, will remain so for some time," Mr McCarthy said.

The bank yesterday concluded a 90-day consultation process with its unions in relation to the severance package that will be granted to staff who opt for voluntary redundancy following the merger of the bank with First Active.

It is understood the bank has agreed to offer 7.25 weeks' pay for each year of services subject to a cap of three years' salary, as well as a retraining grant of €9,280. Some staff will be offered eight weeks' pay for each year of service up to a cap of 2.5 years' salary, while an early retirement option including four weeks' pay for each year of service up to a cap of 2.5 years' salary will be available to a limited number of staff aged 55 and over.

Ulster Bank is cutting 750 jobs from its Irish operations, with 550 to be lost in the Republic.

Mr McCarthy defended Ulster Bank's decision not to pass on yesterday's European Central Bank (ECB) quarter-point rate cut to its variable-rate customers, saying that the majority of its customers were on tracker rates and had received the benefit of the rate cut.

He said variable-rate customers had received some of the benefit of the total 3.25 percentage point cuts that the ECB has announced since October 2008.

Ulster Bank represents 80 per cent of the income at RBS's Europe and Middle East division, which last year made a £108 million operating profit. In the first quarter of 2009, income fell by 5 per cent to £358 million, which RBS said reflected "the impact of lower interest rates on deposit margins and lower volumes in both retail and commercial franchises".

Net interest income increased 1 per cent reflecting higher average balances, but lower margins. Asset margins were up slightly but were counterbalanced by the impact of strong competition for deposits. Non-interest income declined by £20 million or 21 per cent.

Direct expenses at the division fell 4 per cent to £134 million, which RBS said reflected strong cost control and the initial part of its restructuring programme.

Mr McCarthy reiterated that Ulster Bank would not be sold by RBS. "We are a core part of the business. We are a very strong part of RBS and they have been very supportive of us," he said.

Loans and advances were £2 billion lower in the first quarter, reflecting subdued demand, while deposits were £4.1 billion lower.

In London, RBS's share price climbed 14 per cent to 47.4 pence as investors reacted positively to a 26 per cent jump in first-quarter revenues. However, the bank was forced to write down a total of £5.9 billion. RBS chief executive Stephen Hester said conditions would be "tough" in 2009 and 2010. "Over the next two years the efforts of the management will be drowned out by the continuing recession," Mr Hester said. - (Additional reporting: Bloomberg)