RBS expected to commit to Ulster Bank after review

Royal Bank of Scotland

is expected to commit itself to Ulster Bank’s business in the Republic when it publishes its third quarter results at the end of October.

After a lengthy strategic review of its operations here, a recommendation will be made shortly to the UK bank's executive committee that it should retain full ownership of Ulster Bank and commit resources to grow the business here and become a challenger to AIB and Bank of Ireland.

According to informed sources, it is expected that this recommendation would be passed to the full board of RBS with the UK bank likely to make its intentions clear when it publishes its third quarter results on October 31st.

The change of heart is thought to be driven by a better-than-expected performance from the bank, the improving Irish economy and the possibility of significant write backs on problem loans. Ulster Bank has also made significant progress on its mortgage arrears and the sharp increase in property prices here over the past 12 months has changed the metrics around this unit.

Return to profit

Ulster Bank returned to profit in the first half of this year for the first time since the financial crash in 2008.

It made an operating profit of £55 million for the six-month period compared with a loss of £381 million in the first half of 2013. The improvement was driven primarily by a significant reduction in impairment losses across all portfolios.

At the time of the half-year results, Ulster Bank's chief executive Jim Brown said: "Impairment losses have improved by 89 per cent, while the number of customers in mortgage arrears has now decreased month on month for the past 15 months . . . In total, the number of customers in arrears in the Republic of Ireland has reduced by 10,000 compared to the same point in 2012."

In February, RBS announced that it would carry out a strategic review of Ulster Bank's operation in the Republic. It later appointed Morgan Stanley to carry out the bulk of this work.

It also announced that Ulster Bank’s business in Northern Ireland would forge closer ties with RBS in Britain, effectively separating it from the Republic. And RBS took £9 billion in toxic loans away from Ulster Bank to a centralised restructuring group to be worked out.

Permanent TSB

A number of options were mooted for Ulster Bank, including a sale or merger with either

KBC Bank Ireland

or Permanent TSB, which is 99.2 per cent owned by the State.

It is understood that RBS also sounded out some of the largest global private equity players about their interest in either acquiring or taking a strategic shareholding in Ulster Bank’s business in the Republic. Another option that was reported involved an investment by a private equity group followed by a merger with a local financial institution followed by an IPO of the enlarged business.

Ulster Bank is currently in the process of closing 15 branches and sub-offices across Ireland by November. It is the first step in a wider plan to reduce its network to between 175 and 185 locations. Ulster Bank and RBS declined to comment on this matter last night.