ANALYSIS:THE SPLITTING of Ulster Bank's £54 billion (€63 billion) loan book into good ("core") and potentially bad ("non-core") assets offers a glimpse of what is to come as the Irish banks enter Nama, writes
SIMON CARSWELL
Ulster Bank, the third-largest retail bank in the Irish market, has taken an aggressive look at its business book and parked in a new unit £15 billion of development and property loans, and low-rate tracker mortgages, which are costing the bank dearly at present in a low interest rate environment.
The loans will be sold off, restructured or run down over time. Most will end up in the UK asset protection scheme, the British equivalent of Nama which will unblock banks of toxic assets.
Unlike the Irish “bad bank” plan, the UK scheme will allow British lenders to absorb loan losses over time, so they don’t immediately blow a large hole in their capital, requiring further state funds.
Ulster Bank’s parent company, Royal Bank of Scotland (RBS) and Lloyds Banking Group, will transfer almost £600 billion in assets into the insurance scheme.
The plan caps future losses on these assets. The banks, in return, agreed to pay a fee and to absorb some of the initial losses on the loans. Once the first loss is taken, the bank takes on 10 per cent of the remaining risk and the UK government assumes 90 per cent.
RBS, which is 70 per cent owned by the UK government, announced that bad debts in the first half jumped to £7.5 billion, while writedowns totalled £4.3 billion. Some 70 per cent of these impairments and writedowns will be moved to the asset insurance plan. Ulster Bank has moved 27 per cent of its loan book into the “non-core” division which will be managed down by the Irish team under the protection-of-risk scheme.
This compares with an estimated 20 per cent (€26 billion) of Allied Irish Banks’ loan book heading to Nama, 15 per cent (€20 billion) of Bank of Ireland’s book, 37 per cent (€27 billion) of Anglo Irish Bank’s book, 75 per cent (€7.5 billion) of Irish Nationwide Building Society’s book and 4.7 per cent (€800 million) of the loans at EBS building society.
The division of the Ulster Bank’s loans into “core” and “non-core” masks the full extent of the bank’s first-half losses this year. It reported an operating loss of £8 million after a bad debt charge of £157 million, but this just covers the bank’s “core” loan book. Including the “non-core” element, which contains most of the bank’s troublesome loans, the operating losses rises to about £500 million following a total bad debt charge of £641 million.
Ulster Bank’s parent company, RBS, has said that it will seek to clarify whether any of its Irish assets are eligible for Nama, but the chances of Ulster Bank participating remains remote with the UK risk insurance plan in place.
Cormac McCarthy, chief executive of Ulster Bank, was keen to stress that the bank has a future in Ireland, with capital and funding support from its parent bank. RBS has injected €800 million in fresh capital into Ulster Bank this year.
“We believe in the future of the bank, notwithstanding all of the issues out there,” he said.
McCarthy has said that he believes it will be two to five years before the sector recovers.
In the meantime, Ulster Bank is tightening costs further with a further 250 voluntary lay-offs on top of the 750 cuts already announced, which have not been finalised.
Ulster Bank, which has been in business for more than 150 years, is one of the main players on the Irish banking pitch, with a substantial share of the mortgage, small and medium enterprise and personal accounts market. With the shrinking of the domestic banks following Nama and sharp consolidation through mergers, the Government will be keen to retain such a significant player on the field, if at least to keep other lenders in check and retain a modicum of competition.
