GLOBAL ratings agency Moody's has warned it could downgrade Ulster Bank and parent Royal Bank of Scotland because of the UK government's plans to possibly break up the bailed-out lender.
The move is the latest blow for the RBS's Irish wing, which this week announced plans to close 40 branches and cut staff by as many as 1,800 in what is being seen as evidence of the UK government trying to slash costs here.
The ratings action heaps further pressure on UK chancellor George Osborne who has been at the centre of criticisms for his plans to split the largely state-owned finance house into a good bank, bad bank model. A ratings downgrade would drive up borrowing costs for the bank, and could ultimately damage its return to profit.
Moody's said it has put RBS and Ulster Bank under review for a possible ratings downgrade because of uncertainty for bondholders following Mr Osborne's announcements which were supposed to be aimed at speeding up the privatisation of the mostly nationalised bank. The agency said the review of RBS had triggered the review of its Irish subsidiary.
"During the review, Moody's will assess whether the final government decision (on whether to break up RBS) will impact RBS's ability and willingness to provide the same or a lower degree of support to Ulster Bank Group as well as the ongoing strategic importance of Ulster Bank Ireland Limited and Ulster Bank Limited to RBS going forward," Moody's said.
"The heightened level of uncertainty is likely to remain at least until the publication of the government's conclusion from its assessment, after which Moody's expects to conclude its ratings review." Ulster Bank's future has been shrouded in uncertainty since it lost its chief executive, Stephen Hester, last month, stoking fears about a possible sale of the lender.
RBS has been forced to inject almost £14.3bn (€16.63bn) into Ulster Bank to cope with losses on boomtime lending, prompting speculation that the parent could pull out of Ireland altogether rather than keep ploughing in fresh capital.
The parent bank received a £45.5bn (€52.8bn) bailout in 2008 and 2009.
In a speech at the Mansion House in London, Mr Osborne said he had ordered an urgent review – to report in the autumn – into the possibility of breaking up RBS into a "good bank" and a "bad bank", to separate out toxic assets and risky loans from parts of the business which support the economy. The review will particularly focus on assets in Ulster Bank and UK commercial real estate, and will not involve any further injection of taxpayer money into RBS.
But Mr Osborne said the sale of the government's stake remained "some way off".
Moody's said that a full legal split of RBS would have a negative impact on the group's profitability, as well as being disruptive to management.
"At the same time, Moody's recognises that upon completion, the separation could bring long-term benefits to RBS's financial position, with credit-positive implications for creditors of its post-transition going-concern operations," it added.