Ulster says yes to viable future but admits it’s been ‘a painful process getting there’

Jim Brown is a glass half full type of chap, which is just as well when you're the chief executive of Ulster Bank.

He admits to having “done my own due diligence [on the bank] for three or four months” before accepting Royal Bank of Scotland’s invitation to take on the role three years ago.

Brown is no Tom Cruise but it was almost a case of Mission Impossible for him on taking over. Ulster Bank was deep in the red, with a high level of mortgage arrears and billions of euros of dud property loans on its books. Its business model wasn’t fit for purpose in the post-crash era and it only avoided going bust thanks to a £15 billion cash injection from RBS.

“I came to the conclusion that the Ulster Bank brand, the position we had in the market, the opportunities that may arise once we got through the crisis, and the connectivity with RBS were all factors that I thought would result in us having a viable and sustainable business here going forward,” he explains from a meeting room on the top floor of its head office building in Dublin’s George’s Quay.

Ulster Bank is certainly at an interesting tipping point in his 178-year history. Two weeks ago, on the day of its annual results, parent company RBS announced that it was looking at strategic options for Ulster Bank in the Republic. It reaffirmed its commitment to the market here and said it wanted to become a "compelling challenger bank" to AIB and Bank of Ireland, the big two in the Irish market.

Its business in Northern Ireland will take a different direction by forging closer links to RBS’s franchises in Britain, integrating more in terms of products, pricing and marketing.

This was the result of a five-month strategic review by RBS, at the behest of the UK Government, which majority owns the UK bank. Staff in the Republic had expected some details on branch closures and job cuts. Instead, lots of questions remain unanswered.

What’s the plan for Ulster Bank in the Republic?

“We’ve got a very clear strategy right now,” Brown says. “First of all, the bank [he means RBS] is committed to the Republic and to Northern Ireland. That was confirmed in November of last year. We’re doing an operating model review to work out how we can better fulfil our strategic ambitions here.

“In the Republic specifically, what we’ve said is that we’re looking at other options . . . a range of options. If you look at the banking market, it’s very clear that there’s the two pillar banks and there’s us. What we’re looking to do is to become a more compelling choice in the market.

“We think there may be further consolidation [he means mergers or acquisitions] in the market. We’re looking to see if Ulster Bank can play a part in that. Clearly though, that would have to result in us getting a better outcome than our current organic [growth] strategy.”

RBS has engaged Morgan Stanley to advise on potential consolidation plays alongside Brown and John Davison, who heads RBS's strategic investment group in the UK.

“We expect that it will take another couple of months for us to know the outcome,” Brown says. “We’ve already got a strategy here that is working but the issue is, does an opportunity like this add something more than what we’re doing today.”

Earlier this month, the Minister for Finance Michael Noonan revealed that he was looking at the possibility of establishing a third banking force to compete with AIB and Bank of Ireland as the economic recovery gathers momentum.

Brown said Ulster Bank and RBS are interested in discussing this with the Government.

“If there’s an opportunity we would certainly look at it,” he says. “The Government has been very clear. They are looking for a third banking force in the market. I would assume whether it’s organic or through some other option that Ulster Bank would be one of those three.”

Consolidation plays
Has there been engagement with the Government on this?

“The Government is aware that we are looking at other options. Also, they are aware of the changes we have made in dealing with the legacy issues.”

This is a reference to the fact that RBS has shifted £9 billion in problem loans out of Ulster Bank and into a group internal bad bank.

In reality, given the size now of the retail banking market in Ireland, Permanent TSB and KBC Bank Ireland look like the only consolidation plays available.

“There are a number of smaller institutions, without getting into the specifics, and there may be opportunities with those in terms of fulfilling our strategic ambitions, but I couldn’t mention specifically who they might be,” he says.

Both Permo and KBC have their own legacy issues to deal with and a merger with one or other would be far from straight forward. “There’s a lot of work to be done to see if its viable or not,” Brown accepts.

Might RBS ultimately dilute its ownership of Ulster Bank?

“It’s too early to say that. Right now, the commitment from RBS is to the Republic and to Ulster Bank. What we’re looking to do is see how can we build a better Ulster Bank and what other options are there out there other than doing it organically.”

Brown is also looking at options for dealing with Ulster Bank’s €14.6 billion loss-making tracker mortgage book. “We have been looking for quite a while to see if there’s a more strategic solution to trackers. We haven’t found one yet. Again, John [Davison] is working with us on that.

“The problem with trackers is that the margin on them doesn’t give us an adequate return on capital. The margin is just too narrow. We’ve been looking at trackers for a while and we have a number of options out there for customers as we speak. But they are more tactical options than strategic. We haven’t found the strategic solution yet but we are looking at it as a separate initiative in the review.

“The issue with [tracker] mortgages is not that they are credit impaired. It’s that there is a structural problem in the design of the product, where they have been written at an unsustainable margin for a long period of time. It struggles to make the return on capital that we need.”

What return do you need?

“Over 12 per cent return on equity,” he replies.

What’s it making at the minute?

“Less than that. A lot less.”

Brown insists that there is a viable alternative organic growth strategy in place in the event that the bank can’t pull off a merger with a rival in the Republic. The slogan is building a better bank.

He says the retail bank was profitable in the second half of last year and gained market share in all product categories. Its total lending in January was twice that achieved in the same month of 2013 and Brown expects the trends to continue this year.

The number of customers in mortgage arrears dropped by 2,000 last year while it has had 11 consecutive months of decline in this category since March 2013. The arrears mountain is now €1 billion less than a year ago.

As mentioned earlier, RBS has shifted £9 billion worth of dud property-related loans from Ulster Bank to an internal bad bank. These are to be worked out over three years but about £1 billion worth of stuff has been shifted since last June and it sold more than 2,000 properties across the island last year.

Legacy issues
One thing that has become very clear in the past 12 months is that Ulster Bank plans to slim down its branch network and trim its employee headcount.

“It’s very clear that we will have fewer people in the bank in two to three years time,” Brown says. “I’ve made that clear externally as well as communicating it within the bank.”

About 1,000 staff are working on legacy “real estate issues... and mortgage arrears”, which will be resolved over time.

“There are likely to be fewer [job] reductions as a result of efficiencies that we drive in the business and changes to the distribution network,” he explains.

“The biggest reduction [in headcount] is likely to be through the winding up of legacy issues.”

Ulster Bank currently employs about 5,600 staff on the island and has 214 branches. What are the likely numbers in two to three years?

“I said about a year ago that the staff numbers will be about 4,000 to 4,500 across the island and I don’t see any reason why that would change. On the branch network we’ve said about 175.”

He expects a “significant number” of staff will leave through “attrition” annually. “We’ll try and do as many as we can through that route. But it’s likely that over the next two to three years there will some redundancies as well.”

A lot of the change is being driven by customer behaviour, Brown says. “Going back three or four years we had something like 31 per cent of our transactions going through branches. Now it’s down to 16 per cent. Two years ago we had zero transactions on mobile phones, now its at 23 per cent.

“What we expect to see is that this trend will continue. Not just on transactions but on people opening accounts, too. So we expect there will be fewer traditional branches than we have today.

He also expects more third-party tie ups, such as its link with the Post Office in Northern Ireland. Brown was coy about its talks with An Post in the Republic.

“We are exploring opportunities with a number of third parties as we speak,” he says.

But he acknowledged that links between banks and post offices are not uncommon. An Post has had a deal with AIB for more than a decade.

“In many markets around the globe that I’m familiar with , New Zealand , Singapore and other parts of Asia, it’s not uncommon for post offices to do banking transactions and clearly we have that in Northern Ireland and it’s going quite well. And there could be tie ups with other third parties, like retailers and so on.”

Brown’s route to the top job at Ulster Bank was somewhat circuitous. On leaving school, he was “humming and hawing about becoming a doctor” before joining the Canterbury Savings Bank as a junior.

He was a branch manager by the age of 22 before working his way up the ladder with various roles in New Zealand, Australia and parts of Asia. He was a senior executive with ABN Amro when it was acquired by RBS in 2007. "And now here I am."

Given that he came here to “fix the bank”, how does Brown think he’s done?

“All of the things I had thought would come through are in the process of doing so,” he says. “We will have a viable Ulster Bank and we’ll be back in the black in 2014. It’s just been a very painful process in getting there.”

CV: Jim Brown
Name: Jim Brown
Position: Chief executive of Ulster Bank
Age: 53
Lives: Howth, Co Dublin
Family: Married with three adult children
Hobbies: Hiking
Something you might expect: His first job was an office junior at a branch of Canterbury Savings Bank in New Zealand.
Something that might surprise: He's a big fan of live music and you might have seen him at the Oxegen, Beyonce and Roger Waters concerts.

Word up: Jim Brown on . . .
Ulster Bank's 2013 results (it s operating loss rose by 40 per cent last year to £1.5 billion)
"I was pretty pleased with our underlying results. Revenue was up, expenses were slightly up but that was primarily on the back of investing in anti-money laundering, and the Sepa (single euro payments area) transition. Mortgage arrears, and our provisions ,were significantly better. Overall, it was an improving trend.It shows that the strategy we've got in place is working such that we expect for 2014 we will be back in the black, which would be a good result."

How long it will take to sort out mortgage arrears
"I think it will be another couple of years. First of all, the banks have to work through offering solutions to customers and, secondly, the economy has to improve."

Ulster Bank's policy towards home repossessions
"Repossessions will tick up this year on last. Last year, we had 136 versus 84 in 2012. Most of those were voluntary but we do expect it
will increase. We do have cases before the courts as we speak. We're not in the habit of repossessing. The cases before the courts involve people who have not engaged with us for 12 months. A sizeable percentage of cases before the courts are now re-engaging. I would like 100 per cent to re-engage but, being realistic about it, I don't expect that to be the case."

Plans to consolidate the company's office space in Dublin and move its head office from George's Quay to Leopardstown
"We do have surplus property in Dublin and what we're looking at right now is how we can best rationalise that. We will continue to have a presence in George's Quay, the question is how big is that presence.

“The other key question is where is the best place to locate our people. Do they all have to be in prime downtown Dublin real estate? I’m not sure that has to be the case. We’re going through that review right now and over the coming weeks we will announce something from that. We already have a base in Leopardstown and it’s one of the options we would look at.”

RBS's commitment to Ulster Bank
"There's never been any doubt since I've been here [2011] about the commitment of RBS in terms of capital [support] as well as during the worst parts of the euro [currency] crisis."