Ulster draws a line under past by offloading non-core loans

Despite the difficulties, Ulster Bank is a natural 'third force', bank chief Cormac McCarthy tells SIMON CARSWELL

EVEN AFTER Ulster Bank jettisoned €19 billion of its worst-performing loans out of an overall book of about €62 billion into a “non-core” business to run down, the bank still posted an operating loss of €414 million in 2009 in the remaining core operation.

It gives an indication of just how difficult life is for banks in Ireland.

The core business at Ulster Bank, which reports its figures in sterling, posted operating profits of £281 million (€316 million) before bad debts, down 13 per cent from £324 million.

The difficulty with Ulster Bank, now and forever more, is that it will be hard to decipher the overall losses when the bank only reports operating figures for the “good” part of the bank.

Asking for joint figures for how the bank’s core and non-core operations had performed would be like asking AIB for figures for all loans, including the Nama-bound assets after they had been transferred, said Cormac McCarthy, the chief executive of the bank.

Ulster Bank is intent on drawing a line under the past by transferring the non-core loans to parent, Royal Bank of Scotland, though it is still managed out of Dublin.

The bank, like its UK rival in Ireland, Bank of Scotland (Ireland), aggressively squeezed margins in the mortgage market during the boom, selling 40-year and 100 per cent mortgages with gusto. Mr McCarthy says that all banks in Ireland were “ultra competitive” driven by “a very strong supply of money”.

“People were vying for a share and prices came down and that is what happened,” he said. “To characterise it as being just to do with international banks is far too easy. We have acknowledged that we didn’t get everything right for sure but it wasn’t just about us.”

The bank was a heavy lender on property investment and development, which has accounted for £1.3 billion of the £1.9 billion in loan losses posted last year.

The bank’s mortgage book fell to £16.2 billion at December 2009 from £16.7 billion a year earlier, reflecting the bank’s rates which are among the highest on offer.

The bank is still lending to small- and medium-sized enterprises (SME) at its traditional 15 to 20 per cent level, though it says that this market has shrunk sharply.

Mr McCarthy believes lending rates need to rise, while deposit rates must fall. “We don’t believe that it is a price competitive market at the margins that makes sense for us.”

He hopes the National Asset Management Agency (Nama) and the funding support it will provide to the domestic banks will help the liquidity in the overall system, benefiting Ulster Bank which has not joined Nama.

“You have the bizarre situation here now where guaranteed banks are pricing right up for deposits at margins that don’t make any sense at all, which tells you that the liquidity challenges out there are still very stressed.”

Deposits fell 5 per cent, while increasing competition squeezed the net interest income by 7 per cent. Loans fell 4 per cent.

Mr McCarthy said that the sooner Nama is set up the better as “nothing is happening” in the market while people awaited it.

Ulster Bank has attracted much interest from customers of Halifax who must leave the bank when it closes its doors in May by keeping nearby branches open late but this has yet to translate into switchers, he said.

He argues that Ulster Bank is the “natural” third force as it is the only full service bank competing with AIB and Bank of Ireland. He is not hopeful for the savings and home loans “third force” that may be created out of Irish Nationwide, EBS and possibly Permanent TSB.

“It is a very big task and it will take a long time – we are here already,” he said.

But will the support from RBS make Ulster Bank enough of a foil to a potential emerging duopoly of AIB and Bank of Ireland?

“All I can do is put our business in the best place possible to take advantage of any opportunities that come around,” he said. “This is not a market that is ever again going to be characterised by massive lending opportunities.”