Q&A: What will Ulster Bank’s closure mean for customers?

There are a number of reasons why it has come to the stage where the board of British banking giant NatWest, formerly Royal Bank of Scotland (RBS), has decided to wind down its Ulster Bank unit in the Republic.

After more than decade of a shrinking balance sheet following the financial crisis, the bank has been left with a subscale loan book of about €20.5 billion and a high cost base. In recent years, its expenses have ranged between 95 per cent and 111 per cent of income – compared with the typical 50 per cent target of healthy banks internationally.

Ulster Bank has been struggling to rebuild its loan book ever since, amid uncertainty caused by Brexit, a dysfunctional housing market here and, in the past 11 months, the Covid-19 pandemic.

Meanwhile, the income that banks across Europe – and beyond – make from lending continues to be squeezed as interest rates remain at ultra-low levels. The economic shock caused by the pandemic has done away with any thoughts of rates rising any time soon.

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But the big issue is the amount of money NatWest has tied up in Ulster Bank. As things stand, Irish banks have to hold twice as much expensive shareholders’ equity against their total assets – mainly loans – as UK banks do. This is largely due to the perceived riskiness of Irish mortgages and other loans following the property crash and the difficulties faced by lenders repossessing homes, even when borrowers are deep in arrears and are not engaging.

It’s not the first bank to exit the Irish market. How big a deal would it be?

Yes. Bank of Scotland, Danske Bank, and Rabobank (which owned ACC) all pulled out of the Irish retail market, handing back banking licences in the process. And, of course, Anglo Irish Bank and Irish Nationwide Building Society collapsed.

But Ulster Bank, the third largest lender in the State, is much more ingrained in the banking market, tracing its roots back to 1836 and its initial foray into what would later become the Republic in 1860.

It is responsible for about 15 per cent of the mortgage market, 20 per cent of lending to small- to medium-sized businesses (SME), and is a major player in providing funding to large companies.

What will happen with the bank’s mortgage loan book?

Sources said on Friday that Permanent TSB (PTSB), in which the State owns a 75 per cent stake, is in talks to acquire most of Ulster Bank's €14 billion mortgage book and up to €1 billion of small business loans in a deal that almost double the size of its assets.

A potential deal, which are at an early stage, would also involve PTSB taking over a portion of Ulster Bank’s €22 billion deposit book, employees and an amalgamation of the groups’ combined branch networks, they said.

Ulster Bank has 88 branches while PTSB has 76 locations, with the latter holding a greater footprint in the middle and southern parts of the State. Branch closures would be inevitable, according to sources.

Other potential buyers of parts of the mortgage book are also circling. For borrowers, the important thing is that their contracts remain the same no matter where loans end up.

Ulster Bank CEO Jane Howard said on Friday that it remains important that borrowers who are facing financial difficulties as a result of the Covid-19 crisis to engage with the bank on finding solutions. It is likely that the bank will be left managing these loans for some years as it continues its wind down.

And what about that sizeable business banking business?

NatWest said it plans to sell about €4 billion of performing commercial loans to AIB and that it is in early talks with Permanent TSB (PTSB) and other strategic banking companies about their potential interest in buying "certain retail and SME assets, liabilities and operations".

PTSB, as mentioned above, is in talks to buy up to €1 billion of small business loans.

What about deposits?

When the likes of Bank of Scotland went about closing down a decade ago following the property crash, there was a clamour among remaining lenders for the bank’s customers’ cash, as chunks of their own deposits were walking on the door.

This time round, bank are struggling with excess deposits – not helped by the extent to which households and businesses have been squirrelling away money amid the pandemic.

Household deposits in banks reached an "historic high" of €125 billion at the end of 2020, increasing by €14.2 billion over the year, according to the Central Bank.

Banks across the euro zone are being charged negative interest rates of as much as minus 0.5 per cent on excess funds they are placing with the European Central Bank (ECB) as part of an effort by the ECB to get banks to lend more in order to boost the economy – albeit with limited success.

Ulster Bank has about €22 billion of deposits. First and foremost, it’s important to remember that customer deposits remain safe, no matter what.

And the wind-down of the bank will take years, depending on the rate at which its loans and other assets are dealt with.

It’s expected that a large chunk of deposits would travel with a loan book deal with PTSB.

It ultimately possible that Ulster Bank could persuade customers to shift money by applying negative rates on retail deposits. The bank began charging negative rates last July on savings over €1 million held by business customers, credit unions and other institutional clients. However, Howard said on Friday that the prospect of retail customers being charged negative rates is not currently “on the horizon”.

There is little doubt that a flood of unwanted deposits from Ulster Bank into the remaining banks will see them widen the net of customers being charged negative rates.

And what about the bank’s 2,800 staff?

Ulster Bank has shed about 1,000 staff in the Republic in the past decade or so and had unveiled plans to cut a further 266 jobs before The Irish Times reported last September that a strategic review was underway.

In a note to staff on Friday morning, Jane Howard, head of Ulster Bank in the Republic, said there would be “no new compulsory departures from the business this year as a result of this announcement”. And none of its 88 branches would close this year as a result of the wind-down decision, she added.

Howard also confirmed that staff who are “wholly or mainly assigned” to the loan book that is set to transfer to AIB would move with that business.

She said an orderly wind-down would take a “number of years”. This will require many employees to remain on board to see through the process for its UK parent group.