Ulster Bank may take four years to cover costs, says RBS

Royal Bank of Scotland (RBS) executives have said it could be another four years before the group's Ulster Bank unit in the Republic will be making enough money to break even on the cost of its own funding – a decade and a half after the financial crisis.

Outgoing RBS chief executive Ross McEwan told analysts on a call last week that it will be “another three to four years” before Ulster Bank is covering its cost of capital. A company is not able to start making an acceptable return for investors until it is making enough money to cover the cost of its equity and debt funding.

"We've not giving up on Ireland, " said Mr McEwan, who is set to become the head of National Australia Bank by next April. "But it's going to take some time."

Mr McEwan, who has led RBS for more than six years, added that the alternatives to RBS’s strategy to “quietly persevere” and get Ulster Bank into shape “aren’t that good”.

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Ulster Bank, into which RBS pumped the equivalent of a third of its own £45 billion (€49 billion) UK taxpayer bailout in 2008, reported on Friday that its operating profit slumped to €26 million in the first half of the year from €100 million a year earlier.

Drawdowns

Operating costs rose to €322 million from €283 million, boosted as Ulster bank set up a standalone conduct and compliance function.

Total income at Ulster Bank dropped to €324 million from €355 million, as its net interest margin – the difference between the average rate at which it funds itself and lend on to customers – contracted to 1.63 per cent from 1.85 per cent.

Still, the bank increased its share of mortgage drawdowns in the Republic to 16.5 per cent compared with 12.2 per cent early last year.

“What’s interesting in Ireland is it’s starting to grow its market share again – we believe safely this time around, rather than what happened to it last time,” Mr McEwan said.

Ulster Bank announced last month that it was proceeding with the sale of €900 million of non-performing mortgages, as banks in the State engage in the final push to lower their level of problem loans to 5 per cent of total loans. The industry ratio had stood at a peak of 32 per cent in 2013.

Ulster Bank's chief executive Jane Howard told The Irish Times last week that the business is focused on cutting costs as banks across Europe grapple with challenges growing income as central bank interest rates are set to remain lower for longer. Job reductions at the bank's 400-strong arrears management division are likely.

Ulster Bank has returned €3 billion of surplus capital on its balance sheet to RBS between 2016 and early last year by way of special dividend payments. It is estimated to be sitting on at least a further €1.5 billion of excess equity, after shrinking the size of its assets at pace in recent years.

“We look to get some capital out of the business this year and more out next year,” said Mr McEwan.