No takers for Westminster’s Ulster Bank asset swap proposal

Around lunchtime yesterday, there was a flurry of excitement in financial circles here as a report emerged from the UK that the treasury there has considered offering all or part of Ulster Bank to the Government here in return for the National Asset Management Agency's "stinky British assets".

This is one of a number of options apparently being considered by the British government as it ponders the sale of its 81 per cent shareholding in Royal Bank of Scotland, which received a £45 billion bailout from taxpayers in 2008 and 2009.

Ulster Bank is a subsidiary of RBS, operating in both Northern Ireland and the Republic.

The article was written by the BBC's business editor Robert Peston, a respected journalist who has gained much praise for his coverage of the global financial crash.

He had secured a draft copy of a report from the Parliamentary Commission on Banking Standards, which is said to recommend that RBS be split into a good bank and a bad bank.

The Department of Finance wasted no time in pouring cold water on the suggestion it agree to such a swap. A spokesman said there was “nothing in it and we wouldn’t consider it”.

Why would the Government want to own another loss-making Irish bank with billions of problem loans on its balance sheet?

Ulster Bank made an operating loss of £1.04 billion and 13,500 of its mortgage customers are in some form of forbearance arrangement. Given that the State already controls AIB, Permanent TSB and Irish Bank Resolution Corporation in liquidation, and has a 15 per cent share in Bank of Ireland, how would it persuade competition authorities, notably the troika, to approve such a deal?

Why would Nama want to swap what it believes is a good portfolio of assets and loans in the UK for more toxic loans in Ireland? Even if one equated to the other, which they do not.

The UK has been good to Nama thus far. Its annual report, published last week, shows 79 per cent of its €6.8 billion asset sales up to the end of last year have been in Britain, with 63 per cent in London.

Geography of disposal
By contrast, just 12 per cent of disposals were in the Republic – Northern Ireland and the rest of the world accounted for the balance. At the end of last year, one-third of its remaining €22.8 billion loans portfolio was based in Britain, with 21 per cent in London.

That’s €7.6 billion worth of loans, compared with the £37 billion of Ulster Bank assets quoted by the BBC yesterday.

The agency has had more success in the UK this year, notably the recent sale of loans associated with Citi Tower in Canary Wharf for £1 billion to a buyer from the Middle East.

Nama held about one-third of those loans, relating to borrowings by Irish financier Derek Quinlan and British investor Glen Maud from Anglo Irish Bank in the bubble years.

So Nama’s share in the sale was about £333 million and it is thought to have washed its face on these loans.

Separate to Nama, RBS has given no signal of its desire to cut ties with Ulster Bank. Quite the opposite, given it has put more than £15 billion into its Irish subsidiary since the financial crash in 2008.

If it wanted to pull out, it might have packaged up its loans into bundles and either sold off them or outsourced them to a third party. This strategy has been employed by Bank of Scotland since it closed the Halifax retail network here.

Instead, Ulster Bank has decided to work out its loans and handle any asset sales itself. This year alone, something like 700 properties here have been sold by a specialist inhouse unit within the bank.

It is painstaking work but Ulster Bank, and one presumes that RBS is in agreement, believes this offers the best potential return to the company.

Ulster Bank's strategy on many of its high-profile loans has also been distinctive. Unlike rival AIB, it took an equity interest in the Jurys Inn chain of budget hotels, which recently had its borrowings restructured. In addition, it has taken an active oversight role in retailer Arnotts and Seán Dunne's former hotels in Ballsbridge to secure its multimillion loans.

In its recent first-quarter results, RBS said "credit trends in Ireland are turning a corner". Cutting Ulster Bank loose from RBS clearly has it attractions for Westminster, probably even Chancellor George Osborne. This side of the Irish Sea, it looks nothing more than wishful thinking.