WHAT will it take to keep Ulster Bank in Ireland?
When NatWest confirmed last month that it might close Ulster Bank, the news was met with shock and concern from staff and customers alike.
With a 184-year history here and 2,800 employees spread across 88 branches, Ulster Bank is deeply embedded in Irish commercial life. Withdrawal of the country’s third-largest bank from the market would remove about €3bn in annual lending and leave one million customers scrambling to switch their accounts.
Sounds bad, right? Well, it may not have to happen at all.
Ulster Bank is an expensive problem for NatWest. The bank slipped to an operating loss of €276m in the first half as it made provisions for pandemic-related losses. But even before Covid the bank had a very underwhelming performanc e in 2019, booking a small profit of €55m.
This means capital returns for Ulster Bank’s owner are poor. Even after returning a €500m dividend to NatWest late last year, Ulster Bank still retains nearly €4bn in core capital against about € 15bn in assets. That 26.5pc ratio is about 10 percentage points higher than AIB and Bank of Ireland – a lot of money to tie up in a lossmaker.
That capital is an under-utilised surplus from NatWest’s point of view. What’s the point of keeping it in Ireland if it’s not generating bigger profits?
But getting it out is not so simple. If Ulster Bank wants to reduce its capital ratio, it needs permission from the Central Bank, which is responsible for making sure the banks can withstand the stress of a crisis. NatWest did get a cumulative €3bn from Ulster Bank leading up to 2019.
But in the middle of a pandemic, it’s hard to justify lightening the capital burden on a key lender. Even in 2019, with a strong domestic economy, only €500m made it out the door.
So if NatWest can’t get permission to extract capital from Ulster Bank while keeping the bank running, the next best option is to pull it out by winding the bank down over several years. As risk-weighted assets reduce, the amount of capital that can be paid up to NatWest increases.
Unless, of course, the option to close the bank in Ireland is the kind of credible threat that gets the Department of Finance and Central Bank to reconsider the tight capital constraints Ulster Bank has had to live with over the last decade.
For example, if Ulster Bank were permitted to operate with a capital ratio on a par with AIB and Bank of Ireland, that would immediately free up €1.5bn – a nice bounty for NatWest.
Are the regulators listening?
Union launches campaign to keep bank open here
The Financial Services Union (FSU) has launched a campaign to pressure parent company NatWest into a commitment to keeping Ulster Bank open in the Republic of Ireland.
The union, which represents bank staff across Ireland and the UK, has pulled together a coalition including the IFA, ICTU, Sinn Féin and Labour to press its case.
The group has written to NatWest’s board to influence the outcome of a strategic review on Ulster Bank’s future and to try to save nearly 3,000 jobs and billions in annual lending.
NatWest is considering a range of options for Ulster Bank – including a wind-down and closure over several years – after the bank slumped to a large operating loss in the first half of the year.