Royal Bank of Scotland published a trading update yesterday for the third quarter of its financial year, and it included some interesting commentary on Ulster Bank's performance in Ireland. "Rising Irish residential property prices combined with proactive debt management has resulted in lower arrears in Ulster (excluding RBS Capital Resolution), within personal and business banking," RBS said.
“As a result we expect Ulster to record net provision releases in the region of £300 million in Q3 2014. The potential exists for further releases in future, if market conditions continue to improve.”
The release of provisions is highly significant in the context of Ulster Bank’s recovery. Having taken a 55 per cent peak-to-trough provision charge, you’d have to expect more releases would come as the property market here continues to recover and collateral values rise.
At a banking and insurance conference hosted yesterday by Bank of America Merrill Lynch, RBS chief executive Ross McEwan highlighted that 45 per cent of Ulster Bank's business is in Dublin, where property prices have risen by about 23 per cent in the past year.
This positive note is a continuation of a trend that started earlier in the year. If you go back to the second quarter results, RBS reported a “small disposal gain” of £150 million on Irish assets offloaded by its specialist RBS Capital Resolution(RCR) workout unit. These were commercial real estate assets.
The mood music from Edinburgh around Ulster Bank over the past 12 months has changed utterly. In February RBS announced Ulster Bank in Northern Ireland would forge closer links with NatWest in Britain, effectively separating it from its sister operation in the Republic.
It also announced a strategic review of the business in the Republic, later hiring Morgan Stanley to carry out much of this work. This was interpreted as a signal that RBS wanted out of this market and would consider any mechanism – sale, merger, investment by private equity, partial IPO or a mix of these.
Softer language
By July 25th, when it published its half-year results, the language around Ulster Bank in the Republic had softened. For a start, the bank reported a profit of £55 million compared with a loss of £381 million a year earlier.
On a conference call with analysts, chief financial officer Ewen Stevenson said: "Ireland is a good market at the moment."
McEwan added: “We want to create a really strong franchise. The issue we’re trying to solve here . . . is how do we get it like every other business that I operate, getting over its cost of capital.
“We [are] . . . buoyed by a very good economy over there, our management team I think are doing a very good job, but the issue that we’ve asked them to solve for us and with us – is how do we get you as shareholders a return that I expect out of every part of our business.”
My information is that RBS has now decided to commit itself fully to Ulster Bank in the Republic, and we should get a clearer picture of this when it publishes its third quarter results on October 31st.
It appears to be based more around the strength of Irish economic recovery – 7.7 per cent GDP growth in the first half of this year – improving real estate prices, provision releases and the efforts of the local management team, led by chief executive Jim Brown, to tackle mortgage arrears, than a lack of strategic options.
Stevenson’s appointment as CFO in April is also thought to have been a factor, bringing a fresh perspective to the debate.
It remains to be seen what precisely this will mean. Will the Republic business paddle its own canoe or continue to be a part of an all-Ireland Ulster Bank? How much new business will it chase? McEwan’s strategy for RBS is to maximise business with existing account holders rather than chasing new ones.
What is clear is that it will continue to cut costs at Ulster Bank. McEwan’s plan is to trim £5 billion from RBS’s cost base by 2017, to bring its cost-income ratio down to 50 per cent. Branch closures have already been flagged in Ireland, with 15 due to shut by November. Full-time staff numbers dropped by 200 between last December and June.
It remains to be seen if Ulster Bank will become the third banking force Michael Noonan craved back in March but at least it's not joining the exodus of foreign banks from these shores.
