Monday 29 May 2017

Ulster to escape as stress test sell off hits RBS

Ulster Bank's headquarters in Dublin
Ulster Bank's headquarters in Dublin

Michael Cogley and Donal O'Donovan

Ulster Bank won't end up on the auction block after its British parent failed a Bank of England stress test, but the Irish arm will come under pressure to deliver more capital back to the UK faster, according to analysts.

Ulster Bank insisted yesterday that it is not directly affected, after its UK taxpayer-controlled owner Royal Bank of Scotland (RBS) said it will cut costs and sell assets to boost capital, after failing a Bank of England stress test.

The Irish bank is regulated as a stand-alone entity by the Central Bank here. Its UK parent, which was bailed out to the tune of £45bn after the banking crises, rushed out a statement yesterday after the test results saying it will take a range of actions to make up the capital shortfall identified, amounting to about £2bn.

Investec analyst Owen Callan said the news will increase the pressure on Ulster Bank to "stand on its own two feet" and distribute capital back to its parent.

"Ulster Bank is no longer a problem for RBS. They had to put a lot of capital into it during the crisis and now they have been able to take some of it out.

"They will, I'm sure, gladly take more and more of that out if Ulster Bank can continue on the strong profitability that it has shown," Mr Callan told the Irish Independent.

Goodbody's John Cronin said it is "extremely unlikely" that RBS will push major strategy changes at Ulster Bank as a result of the failed stress test. The Irish bank is already cutting costs and has sold off a swathe of problem loans.

Ulster Bank's return to profit last year means the bank is no longer a drain on its UK parent. The Irish arm is hugely well capitalised. Yesterday, Ulster Bank was due to pay €1.5bn to RBS, the first major dividend paid out of any lender here since the Crash, after the bank had secured permission from the Central Bank to reduce capital.

A sale of Ulster Bank is seen as unlikely, even after RBS said yesterday that it will make asset disposals.

"The market just isn't there for it [Ulster Bank] at the moment. European banks aren't being particularly expansionary in general, there isn't too much M&A going on.

"There are no other banks looking to expand forcefully into new markets, some are bolting on bits and pieces on existing markets but there's no big foreign player in the Irish market that could take on Ulster Bank," he said.

Shares in RBS, which was bailed out by UK taxpayers eight years ago, fell as much as 4.6pc.

The failed test underlines a litany of problems RBS is grappling with, including a mounting legal bill for misconduct before the Crash and difficulties selling assets such as its Williams & Glyn business.

The Bank of England (BoE) approved RBS's new capital plan on Tuesday night.

"Its challenge is that it still has legacy issues ... .There's misconduct costs. There's impaired assets. They're still working through the so-called non-core assets, on which they have made progress," BoE Governor Mark Carney told reporters.

"They are not talking about raising capital. The magnitude of their plan is much bigger than the size of the shortfall in the stress test."

Asset sales avoid the embarrassment of a rights issue, that would mean putting in more taxpayer money. (Additional reporting Reuters)

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