More losses likely in banking sector

ANALYSIS:A major fall in activity in its banking business made Ulster Bank's job cuts decision inevitable, writes SIMON CARSWELL.

IT SHOULD come as little surprise that Ulster Bank is closing First Active, transferring the business into a single entity encompassing both banks, and seeking up to 750 job cuts across the banking group.

Banks and financial companies around the world have been laying off hundreds of thousands of staff as their losses on toxic assets and the falling value of properties and other assets continue to rise.

Banks in Ireland have not escaped the pain, though the cuts to the payrolls of Irish lenders have been limited so far to recruitment and pay freezes, cuts in bonuses and high-profile resignations of senior bank executives. The redundancies at Ulster Bank and First Active are the first major job cuts announcement by a large bank operating in Ireland. Fine Gael and Labour suggested the job losses may be the first of thousands in the financial sector.

Labour’s Seanad finance spokesman, Alan Kelly, said the redundancies were “the first substantial post-property bubble job losses in the retail bank sector but not, I suspect, the last”.

Bank of Ireland said earlier this month that it would be cutting up to 600 jobs in its 4,000-strong UK workforce but has not made any of its Irish-based staff redundant.

Irish Life Permanent, the State’s largest mortgage lender and life and pensions company, chose a more unusual way to reduce payroll costs last November by offering staff up to €35,000 to take career breaks.

Activity in the Irish banking sector has fallen dramatically, so a reduction in costs across the Irish banking sector is justified, particularly given the increased risks facing the taxpayer as a result of the bank bailout plan.

According to the Irish Banking Federation (IBF), 41,000 people are employed by retail Irish banks. The figure rises to 94,000 when staff in financial services firms are included. Job cuts in the sector have been modest so far.

It’s no surprise that Ulster Bank is shutting First Active down, given the fall-off in investments and property lending, First Active’s two areas of business, due to the housing slump and financial crisis.

The bank’s owner, Royal Bank of Scotland, would hardly need to run two Irish banks given the decline in this market and its own difficulties in the UK.

Ulster Bank said yesterday’s decision was “taken at a local level” and not motivated by RBS’s problems, though RBS is still reviewing all its businesses.

First Active was one of the most aggressive lenders during the property boom, being the first bank to introduce 100 per cent mortgages in the mainstream lending market. However, just as First Active rode the property wave, new business fell sharply as the tide went out. Ulster Bank has curtailed new business growth at First Active over the past year.

Both banks cut commissions to brokers and were quick to pass on higher interest rates as their funding costs rose.

First Active’s reluctance to lend is reflected in its standard variable rate, which, at 6.04 per cent, is the highest in the market and more than three times the European Central Bank’s 2 per cent rate.

Given that Ulster Bank could not raise margins in a declining market, drastic cost-cutting was one of the few options available. Circumstances will undoubtedly force others to follow its lead.