AIB in talks to buy Ulster Bank’s €6.5bn tracker loans

Sources say debt expected to be bought at discount due to low returns

AIB’s interest in the tracker loans emerged on Friday, hours after smaller rival Permanent TSB (PTSB) confirmed that its plans to acquire €7.6 billion of standard mortgages and small business loans as well as 25 branches from Ulster Bank.

AIB’s interest in the tracker loans emerged on Friday, hours after smaller rival Permanent TSB (PTSB) confirmed that its plans to acquire €7.6 billion of standard mortgages and small business loans as well as 25 branches from Ulster Bank.

 

AIB is in talks to acquire Ulster Bank’s low-profit €6.5 billion tracker loan book in the Republic, according to sources.

The development comes a month after AIB agreed to buy €4.1 billion of corporate and business loans from Ulster Bank, as the latter goes about withdrawing from the market.

Sources say that AIB will be expected to buy the book at a discount to reflect the fact that tracker loans are generating low returns, priced off the European Central Bank main rate, which has been at a record low of zero per cent since March 2016.

Ulster Bank’s tracker loans are currently yielding a net interest margin – the difference between the average rates at which the bank funds itself and lends on to customers – of 0.75 per cent, compared to about 2 per cent for its non-tracker home loans, according to estimates of Davy analyst Diarmaid Sheridan, contained in a report wrote in March.

AIB’s talks to acquire Ulster Bank’s tracker loans may also reflect a view that ECB rates will rise over the medium term.

Expectations

Still, the ECB moved on Thursday to push expectations of a rate rise well into the future, as it signalled it will let inflation run hot to make sure it reaches its target of 2 per cent. That inflation goal is unlikely to be reached for at least two years, according to the ECB’s own estimates, and economists now forecast that it could be 2024 or 2025 before rates rise again.

Irish banks pulled tracker loan offers in 2008 as their own funding costs spiralled and moved out of kilter with official central bank interest rates. They have had to set aside a total of more than €1.5 billion to cover refunds, compensation, administrative costs and provisions for regulatory fines in recent years, after the industry was found to have wrongly denied thousands of customers their right to tracker loans – or put borrowers on the wrong margin above the ECB rate.

AIB had about €7.4 billion of tracker loans on its books as of the end of December, accounting for a quarter of its Irish residential mortgages portfolio.

A deal with Ulster Bank would mark the first time an Irish bank has targeted an expansion of its tracker book since the onset of the financial crisis. A spokeswoman for Ulster Bank and a spokesman for AIB declined to comment.

Rival

AIB’s interest in the tracker loans emerged on Friday, hours after smaller rival Permanent TSB (PTSB) confirmed that its plans to acquire €7.6 billion of standard mortgages and small business loans as well as 25 branches from Ulster Bank.

PTSB and Ulster Bank’s owner, NatWest Group, said that they had signed a memorandum of understanding on the shape of a proposed deal, which would also see between 400 and 500 Ulster Bank employees transfer.

The proposal would also see NatWest take a 20 per cent stake in PTSB as part payment.

Ulster Bank will still be left with about €1.5 billion of problem loans, mainly mortgages, after the planned sales of its performing loans, according to analysts. The bank is likely to also seek to sell these to a distressed debt fund in the coming years to complete the off-loading of its loan portfolios.