Rising house prices drive Ulster Bank loan losses lower

Ulster Bank owner Royal Bank of Scotland is to "significantly outperform" its bad loan target for Ireland for 2014, as the economic recovery gathers strength. The announcement further increases the likelihood that the bank will affirm its commitment to its Irish operations when it publishes its third quarter results at the end of October.

This morning the bank revealed that it expects full year impairments - which it previously targeted at about £1 billion (€1.3 billion) - to be lower than expected.

“The third quarter of 2014 has seen continued improvement in economic conditions and asset prices in our key markets, including Ireland,” RBS said. “This has supported a further quarter of strong operating performance by RBS Capital Resolution.” Rising residential property prices also helped lower arrears at the Ulster Bank division, RBS said.

RBS Capital Resolution, RBS's "bad bank" led by Rory Cullinan, will in the third quarter release about £500 million pounds of money previously set aside for souring loans. In Ireland, about £300 million of money previously set aside for bad loans will be released, with room for "further releases in future if market conditions continue to improve," according to the statement.

Ulster Bank swung into a £55 million operating profit in the first half of the year from a £381 million loss in the year- earlier period, as loan losses plunged. The lender’s cost-to- income ratio was 69 per cent, below a peak during the financial crisis of 84 per cent.

Ciaran Callaghan, senior credit analyst with Merrion Capital, said that while Ulster Bank's low margin back book of tracker mortgages is likely to constrain its ability to generate returns above the cost of capital, he still expects RBS to remain committed to its Irish franchise over coming years in order to benefit from further recovery.

“It appears that this strategy is already reaping dividends, which bodes well for the future of the Irish business,” he wrote in a note about today’s announcement.

RBS shares jumped on the back of the news as much as 5.1 per cent to 379.70 pence, the highest since October 2013, and were up 3.9 per cent at 8:55 a.m. in London. They have advanced about 11 per cent this year, making the bank the only major UK lender to post gains.

“We have actually gone through a kitchen sink and a faster disposal plan - running down non-core assets without playing the waiting recovery game,” Chirantan Barua, an analyst at Sanford C. Bernstein Ltd. in London said. “If Ireland were to continue its current trajectory, future write-backs could easily be double the year-to-date numbers.”

(Additional reporting Bloomberg)