Loss makes Ulster Bank RBS's worst division

ULSTER BANK made an operating loss of £85 million (€95 million) in the third quarter as impairments soared and margins were squeezed, according to a trading update from its parent bank, Royal Bank of Scotland (RBS).

The third-quarter loss, which compares to a profit of £81 million in the same period in 2008, meant Ulster Bank was the worst performing division in the bank, which is 84 per cent owned by the British government. Only one other division – the US retail and commercial unit – recorded a loss.

Impairment losses at Ulster Bank surged to £144 million, up from £17 million in the same quarter last year, the Edinburgh-based bank said. This follows writedowns of £90 million in the quarter to the end of June.

RBS said the increase in impairments at Ulster Bank reflected the “difficult” economic environment in Ireland. Some £30 million of the £144 million in writedowns related to mortgages.

Ulster Bank said SME and corporate customer numbers were stable over the last year, and that the number of consumer accounts increased 4 per cent.

Net interest margins slipped from 2.03 per cent in the second quarter to 1.74 per cent in the three months to the end of September. Net interest income at Ulster Bank plummeted to £176 million, down from £207 million in the same period last year, while income from fees and commissions came to £45 million, down from £69 million.

The third-quarter performance takes Ulster Bank’s losses for the first nine months of 2009 to £93 million.

Ulster Bank chief executive Cormac McCarthy said the bank was still a “core part” of RBS after the group said earlier this week that it would sell off some businesses to offset EU competition concerns. The bank said it was continuing to implement its restructuring programme, which would result in a 4 per cent decrease in costs. About 1,000 staff have left or are due to leave the bank this year.

Overall, the part-nationalised RBS more than halved its operating losses to £1.5 billion in the third quarter as impairments fell, but less favourable trading battered investment banking profits.

RBS said impairment losses totalled £3.3 billion, down 30 per cent from £4.7 billion in the second quarter, and were showing signs of levelling off.

But the bank cautioned that bad loans were expected to “remain at elevated levels for the next few quarters”.

RBS said operating profit for its global banking and markets business shrank to £375 million in the latest quarter, from £1.1 billion in the second quarter, as “exceptionally strong conditions” seen in the first and second quarters eased.

“I have repeatedly said this is a marathon, not a sprint, and so it is proving,” chief executive Stephen Hester said of the banks’ performance over the past three months.

RBS had warned in August that investors should not expect a “miracle cure” for the battered bank, where investment banking profits, which have lifted the bottom line for most of its rivals, have failed to offset the impact of bad debts.

Earlier this week RBS secured a further £25.5 billion capital injection from the British government as part of a deal that will make the terms of a government-sponsored insurance scheme for bad debts more flexible, but will also see dramatic disposals and increase the British government’s stake to more than 84 per cent.

RBS and bailed-out rival Lloyds Banking Group agreed to cut back their business to meet EU state aid rules, but RBS was particularly badly hit, forced to sell chunks of its retail bank, its RBS Insurance arm and to shrink its investment bank.

“RBS is still a recovering basket case, but it’s going in the right direction,” said John Smith, a fund manager at private bank Brown Shipley and Co in Manchester. – (Additional reporting: Bloomberg)