PTSB circles Ulster Bank SME business as decision looms

Parent group NatWest looking to wind down Irish unit as part of strategic review

Permanent TSB (PTSB) has retained investment bank Morgan Stanley to advise on a potential bid for Ulster Bank's small- to medium-sized business (SME) portfolio in the Republic, according to sources.

It comes at a time when Ulster Bank's UK parent, NatWest Group, is looking at winding down the Irish unit as part of a strategic review of the business. There is an expectation in Irish banking circles that NatWest will outline its plans for the division when it unveils full-year results on February 19th.

Ulster Bank does not give a breakdown of the SME loan book within its wider commercial banking operation. However, it is understood that the portfolio amounts to about €4 billion, including property loans and credit extended by its Lombard asset finance business. This equates to about 20 per cent of the Irish SME market.

It is not clear how much of the Ulster Bank SME franchise PTSB has its eye on, particularly as the quality of a portion of the book will have deteriorated as a result of the Covid-19 pandemic.


PTSB chief executive Eamonn Crowley highlighted in July, as he was appointed to the role, that he planned to redouble the bank's efforts to crack the SME market. The lenders' SME book amounted to €47 million at the end of 2019, having more than doubled off a very low base in 2018.

"An acquisition of the Ulster Bank Ireland SME portfolio would have a transformative impact on Permanent TSB's earnings profile, given the scale benefits that would emerge, and it would accelerate its move into a targeted area of growth," said Diarmaid Sheridan, an analyst with stockbroking firm Davy, said in a note to clients on Friday. "In addition, a sale to PTSB would ease concerns on an Ulster Bank Ireland exit from the market from a competition perspective."

Mr Sheridan and Goodbody Stockbrokers analyst Eamonn Hughes said on Friday that a purchase of Ulster Bank’s underlying SME portfolio, which they estimate at between €2 billion and €2.5 billion, after larger corporate loans are stripped out, could be funded out of PTSB’s excess liquidity and capital reserves.

Covid-19 economics

State-controlled PTSB’s €17.8 billion customer deposits base was €2.8 billion larger than its performing loan book as of the end of last September. Its most recently reported level of capital reserves stood at 15.7 per cent of so-called risk-weighted assets, well above the current minimum requirement of below 9 per cent set by regulators.

Still, the bank will be expected to maintain a comfortable capital cushion to absorb potential loan losses resulting from the Covid-19 economic shock, and meet higher future regulatory requirements following the crisis.

A spokeswoman for NatWest said: “We continue to evaluate the impact of Covid-19 and the challenges to the economy and we are reviewing our strategy appropriately and responsibly in light of these events. In the event of any changes being made to our strategy, these would be undertaken with full consideration of any impact on customers, colleagues and shareholders in the first instance.”

Spokeswomen for PTSB and Morgan Stanley each declined to comment.

PTSB had been widely speculated as a potential merger partner for Ulster Bank in the Republic over the past decade, as both grappled with low profitability due to the small size of their remaining balance sheets and relatively high cost bases following the financial crisis.

However, PTSB chief executive Eamonn Crowley moved in October to dampen talk that his company could emerge as a potential “white knight” partner for Ulster Bank as NatWest carried out its review.

Still, a move by PTSB to bid for Ulster Bank’s SME franchise would likely be welcomed by the Government, which owns 75 per cent of the bank, as it would help address competition concerns in this area of the market.

Lending competition

Central Bank deputy governor Ed Sibley told the Oireachtas finance committee last month that the potential exit of Ulster Bank from the Republic would be felt most in the market for lending to SMEs, as it would effectively reduce competition to two banks: AIB and Bank of Ireland.

"Were Ulster to decide to leave, that would be the area that is most concerning," Mr Sibley told the committee at a hearing on December 15th, noting that the current trend for competition in SME lending "is downwards" even as the mortgage market has seen new entrants in recent years.

Davy’s Mr Sheridan said: “For the past number of years, PTSB has sought to organically grow its SME portfolio and, while new lending has continued to increase, it remains a small part of the overall portfolio. As part of its growth ambition, it has hired a number of SME bankers to increase its capabilities in the space. An acquisition of a portfolio would immediately provide it with significant scale and customer base.”

Other Irish banks, AIB and Bank of Ireland, are also keeping an eye on potential loan acquisition opportunities in the event that NatWest opts to exit the Irish market. Sources said in October that US distressed debt firm Cerberus was also weighing a bid for the entire €20.5 billion Ulster Bank loan book, with a view to selling on performing loans to other banks while keeping problem debt for itself.

“A possible winddown scenario could see NatWest keep the corporate book, PTSB take the SME book (AIB & BOI would likely be restricted) and swathes of the mortgage book could be sold or securitised, or picked up by one of the main banks,” said Mr Hughes at Goodbody.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times