Ulster Bank and KBC may have exited because of higher capital requirements

More stringent capital requirements may have triggered the exit of Ulster Bank and KBC from the Irish market, debt ratings firm DBRS Morningstar has said.

“The higher capital requirements for Irish Banks against their mortgage exposures compared to other European peers could be one of the reasons pushing foreign banking groups to exit the Irish market,” it said in a note on the Irish banking sector.

Irish-based lenders have long complained that the capital requirements in the Republic remain at financial crisis levels and that this drives up the cost of doing business and the cost of mortgages, which are considerably more expensive here.

Exits

The planned exits of Ulster Bank and KBC Bank Ireland from the market will narrow competition to just three banks.

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DBRS Morningstar said a more concentrated Irish banking sector “could strengthen the [REMAINING]banks’ market positions, bring client diversification and reinforce revenue generation.”

However, it cautioned that any transaction must be carefully evaluated from the capital and risk perspective.

It noted that restrictive lockdown measures continue to be enforced in Ireland and "the long-term effects of the pandemic on the Irish economy remain unknown".

It said while Irish banks have significant capital cushions against minimum requirements to consider potential inorganic growth opportunities – in other words acquisitions – there were signs of credit deterioration in 2020 brought on by the pandemic.

And that the full impact of the pandemic on banks’ balance sheets was still not known.

“It remains difficult to assess the full potential impact of the pandemic on the banks’ asset quality until Government support measures are withdrawn,” it said.

AIB has signed a non-binding Memorandum of Understanding for the acquisition of around €4 billion of Ulster Bank corporate and commercial loan book while Bank of Ireland is in talks to acquire the entire performing loan portfolio of KBC Bank Ireland.

Sector

DBRS Morningstar said the Irish banking sector is currently dominated by the two largest banking group Bank of Ireland and AIB which reported dominant market shares in new mortgage lending of 25.5 per cent and 28.4 per cent respectively at the end of 2020.

It said the two lenders accounted for 57 per cent of total household mortgage loans among the five retail and commercial banks operating in Ireland and 88 per cent of total SME and corporate loans .

Ulster Bank is the third largest bank in Ireland with around 15 per cent market share in mortgages and 20 per cent in SMEs followed by PTSB (17.9 per cent market share in mortgages and limited exposure towards SMEs and consumers), and KBC Bank Ireland (8 per cent reported market share in retail banking).