Posted on Friday 1 November 2013 by Ulster Business


The future of Ulster Bank was clearer this morning after its parent company Royal Bank of Scotland committed to being in the Irish market as it announced it won't be creating an external "bad bank" for its most risky loans.

HM Treasury this morning published its review of the bank entitled 'RBS and the case for the bad bank' in which it sets out a new strategy designed to ensure the bank is a boost to the British economy instead of a burden.

RBS is currently majority owned by the taxpayer after the Government had to bail it out during the financial crisis.

The bank has been working with Treasury to decide what to do with a pool of £38bn of poorly performing loans at risk of not being paid back, with one option to create an external bank for them separate from RBS.

There had been speculation that Ulster Bank as a whole could be placed into that bad bank. But instead of an 'external' bad bank that would require more taxpayers' support, it will now create an 'internal' bad bank funded by RBS itself and known as the RBS Capital Resolution Group.

Around £9bn of Ulster Bank loans will be managed by the new bad bank.

RBS chief executive Ross McEwan, who took over the top job on October 1, said in a statement: "Through this review it has become clear that the effort, risk and expense involved in the creation of an external bad bank is not justified. The good bank/bad bank review has from the start been carried out in conjunction with the Prudential Regulation Authority. This has allowed us to address our shared objective of identifying ways in which to strengthen the capital position of the bank, speed up the recovery in our core UK businesses and accelerate the path to privatisation. The options open to the Group have been debated extensively by the Board and the Board has decided that RBS should take the actions we are announcing today.

"One of the first steps we are taking is to create an internal "bad bank" to manage these assets down so as to release capital. Our goal is to remove between 55% and 70% of these assets over the next two years."

While the CEO said there was "inevitable uncertainty" associated with running down such assets, RBS had a clear aspiration to "remove all these assets from the balance sheet in three years".

"Disposing of these assets over a shorter timeframe will reduce the value we can expect to recover, and will lead to accelerated and increased impairments," he added. "This is the right thing to do as we sharpen our focus on our customer businesses, which account for over 90% of our assets."

There was an indication however that RBS expects big changes in the way Ulster Bank has been operating, after it announced a review would be carried out with Treasury to find a "sustainable business model" for the bank, which is the largest in Northern Ireland and the third largest in the Republic.

Mr McEwan said: "Like all of our businesses, Ulster Bank will form part of our February 2014 review. Subject to regulatory approval, a number of Ulster Bank assets (approximately £9bn) will be managed by the "bad bank" and run down. But we also need to have full confidence that the rest of the Ulster Bank business is doing all it can for its customers and is playing its part within the wider company. We need to ensure that we have a viable and sustainable business model for Ulster Bank as part of this review. It's an important business for the whole island of Ireland and we understand the need to get this right."

The tone of the statement was echoed in HM Treasury's report, which said: "While Ulster Bank fits well with RBS's strategic footprint and core capabilities, a sustainable operating model needs to be found for it so that it is a viable business in a normalising Irish economy.

"There is considerable connectivity between Ulster and the rest of RBS. It is the largest bank in Northern Ireland, and so is important to the health of the UK economy. UK businesses benefit from a bank which is active in both the UK and the Ireland, which remains one of the UK's largest export markets. And Ulster benefits from considerable synergies with the rest of the RBS Group."

A spokesman for Ulster Bank said the company welcomed the UK government's review, which "confirms Ulster Bank as a core business for RBS and acknowledges the importance of Ulster Bank to the whole island of Ireland".

"We will now work through the detail of how we will operate the "bad bank" and the structure required to support this. In the meantime, it is business as usual for our customers and we will communicate directly to any impacted customers," he said.

Meanwhile, Ulster Bank also posted an operating loss for the third quarter and the first nine months of the year.

While the bank had an operating profit of £72m for the quarter before impairment losses, once bad debts of £204m were added in, it registered a loss of £132m.

It was the same story for the year to date, with operating profits of £246m cancelled out by £707m of impairments, leaving an operating loss of £461 for the nine month period.

The figures were better than the comparable period a year ago, when Ulster Bank posted operating losses of £242m in the third quarter and a loss of £797m for the first nine months of 2012.

In its results filing Ulster Bank said: "Operating results showed further improvement in Q3 2013 primarily due to lower impairment losses. Ulster Bank's investment in programmes to assist customers in financial difficulty has resulted in six consecutive months of declining mortgage arrears and this, coupled with stabilising economic conditions, has driven an improved impairment performance."



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