Ulster Bank, the Irish division of majority-nationalised UK bank Royal Bank of Scotland (RBS), is expected to report losses next week of as much as €200m for 2009, following a year of high impairments, shrinking margins and severe job losses.
The bank, Ireland's third-largest after AIB and Bank of Ireland, suffered an expected serious deterioration in loan quality in the second half of last year as the recession claimed more businesses and jobs, while funding costs remained high.
"Our results for the third quarter of 2009 continue to reflect difficult market conditions," Ulster Bank chief executive Cormac McCarthy said last November following an RBS trading update. "In line with expectations, we are reporting an operating loss of £85m (€97m) for the quarter, which largely reflects increased impairment provisions and funding costs."
As a result of these ongoing difficulties, RBS has had to recapitalise Ulster Bank with €2.6bn of fresh funds to fill in the holes in the balance sheet caused by the large losses – and to protect against future ones.
Senior sources at Ulster have told the Sunday Tribune that the bank has an independent future in Ireland, outside of both Nama and whatever "third force" emerges from the restructuring under way in the sector. In fact, Ulster already regards itself as the incumbent third force in the market.
Ulster Bank is sensitive on this topic. As if to underscore the point, it has a page on its website which catalogues the opening dates of its 146 Irish branches, the oldest of which was established in 1836. Internally, Ulster likes to think of itself not as a foreign-owned bank in Ireland, but as an Irish bank with a large foreign shareholder.
The bank's future may have got a little brighter earlier this month, notwithstanding expected losses next week, when rival Bank of Scotland Ireland (BOSI) finally conceded it would have to close its retail arm, Halifax, after four years of losses.
Ulster is making a play for Halifax customers abandoned by BOSI's decision to close the retail business. Executives circulated a memo to staff with key messages for potential switchers. Chief among them: "We're here to stay!"
The bank has put "come hither" ads in all the major newspapers and Ulsterbank.ie has posted a prominent "welcome" sign, inviting Halifax refugees to switch to a new home, right beside a promo for its Visa debit card – a payment card familiar to Halifax current account holders but unavailable elsewhere, and proving a "big pull", according to the bank. Ulster Bank branches near the soon-to-close Halifax branches also had extended opening hours last week to accommodate any new business from the retreating competition.
All this is a big change from the much more dour and defensive posture the bank adopted last year.
Starting then, the bank began absorbing its First Active subsidiary, closing 10 branches and shedding 1,000 jobs – a disproportionate share of the 2,600 jobs lost at across the entire RBS group. In addition, Ulster was the worst-performing division with the highest relative loan losses.
This caused the bank to retrench, especially from the mortgage market where it had previously been one of the most aggressive lenders. Ulster effectively conceded territory to its rivals, declining to pass on ECB rate cuts and withdrawing from broker distribution to support its ailing branch business. This may have slowed margin attrition somewhat, but it came at the expense of market share. Ulster's big rivals, AIB and Bank of Ireland, together took about 80% of new mortgage business in 2009, according to market sources.
While fresh opportunities have arisen in the retail market – NIB is also dramatically cutting back its high-street presence – the bank's exposure to property and development remains a major problem that it is only just beginning to deal with.
Earlier this year, Ulster took an equity stake, along with two other banks, in Seán Dunne's stalled Ballsbridge development project, for which he paid €379m in 2005. Other property-related losses continue to mount.
And SME lending is on the floor, too, with small business owners reporting Ulster Bank among the most difficult banks from which to secure new finance. As of late last year, the bank had managed to disburse just €7m from a €100m line of credit from the European Investment Bank – even less than other EIB recipients AIB, Bank of Ireland and BOSI.
Ulster cannot be ruled out as an opportunistic buyer in the expected large-scale reorganisation of the Irish financial services sector over the next few years.
"Cormac McCarthy is the only chief executive left in this town with the wherewithal and credibility to do deals," said a former chief executive of a rival bank.
McCarthy and capital markets chief Robert Gallagher are both highly respected and well-connected in the world of Irish banking and continue to receive the backing of their much larger parent which, although in serious trouble in Britain, continues to view Ireland as part of its core market.
With Bank of England deputy governor John Gieve admitting last week that RBS was still "in intensive care", nothing about Ulster Bank's future can be taken for granted.
While its parent has shown €2.6bn in capital commitment to Ulster since the start of the crisis, the UK bank remains 84% owned by the UK treasury as a result of its own write-downs on bad loans and poor investments during the boom. RBS has nearly £300bn in the UK's asset protection scheme, which cost billions in insurance-type payments each year.
Although it now has quite healthy levels of capital relative to market demands, the loss cycle is not yet over. Ulster did aggressively recognise losses in commercial property last year, but there is "much more to do" as the bank manages through further impairments, according to NCB Stockbrokers.