The announcement by NatWest Bank that Ulster Bank is to close its operations in the Republic is a sad development, representing the departure of an institution with long and deep links to the State. Ulster Bank has a long history with business and personal customers and is a sizeable player, with 2,800 employees, over one million customers and 88 branches. It is the end of a banking era, which involved a major cross-Border operation for many years.
The news brings concerns for both customers and employees. However, NatWest has signalled that its departure will be gradual and so the implications for both groups will take time to emerge. Consumer protections remain for borrowers, though they will inevitably be concerned about who takes on their loans. The Irish banking market has never really recovered from the financial crisis, which led to the departure of a number of international players and left a legacy of bad loans. Competition has suffered and will now take another blow from Ulster Bank’s departure.
The lack of a fully competitive market is not the only reason why interest rates here are higher than in most other EU countries – but it is one factor. And the departure of a player with 15 per cent of the mortgage market and 20 per cent of SME lending is bound to be significant. Given the state of international banking markets, it is most unlikely that any major EU bank will take an interest in Ulster Bank’s loan book – though international funds are likely to do so.
The initial interest from AIB and Permanent TSB in buying parts of Ulster Bank's loan portfolio reflects the reality that any banking buyer is likely to be Irish. Both are majority State-owned, of course, and the Government will be keen to avoid international funds – so-called vultures – buying Ulster Bank loans. Nonetheless these are far from done deals. And in the case of Permanent TSB the State might have to provide capital to allow it to complete any deal.
Big decisions thus lie ahead.These will be made all the more difficult by the write-downs in bank loan books likely to emerge in the wake of the Covid-19 pandemic on both business and personal loans. This will make valuing Ulster’s loan portfolio difficult, as well as creating issues for potential buyers in their own loan books.
Minister for Finance Paschal Donohoe will be somewhat relieved by the terms of the NatWest announcement, but a difficult path remains ahead. Any acquisitions have to make commercial sense for AIB and Permanent TSB. Creating some kind of new banking force is no easy task, particularly given the challenges of Covid-19 and the associated environment of rock-bottom interest rates. Already facing more than enough problems in navigating a way out of the pandemic, the Government has now been thrown another tricky curveball to deal with.