Sunday 25 February 2018

'Banks must be able to recover the money owed'

Donal Donovan

Relaxed, confident and though only slightly patrician in his bearing RBS chief executive Stephen Hester doesn't give the impression of a man in a hurry, certainly not one in a rush.

Relaxed, confident and though only slightly patrician in his bearing RBS chief executive Stephen Hester doesn't give the impression of a man in a hurry, certainly not one in a rush.

For all his calm though the 53-year-old banker appointed to head the UK's mostly state owned lender Royal Bank of Scotland (RBS) is racing to meet some very tight deadlines.

In his wider work he's under pressure to deliver for British taxpayers by guiding Ulster Bank owner RBS back into private hands after a £45bn (€52.8bn) taxpayer bailout.

British Prime Minister David Cameron has piled the pressure on Hester to hurry up the process, saying the bank should be made ready for sale as "fast as possible", earlier this month.

The pressures are less daunting but more immediate during a recent 24-hour visit to Dublin.

The flying visit includes a hectic round of meetings; with Central Bank governor Patrick Honohan, with managers at Ulster Bank, with big customers and with Taoiseach Enda Kenny.

Add in briefings from economists, a sit down with the Irish Independent and attendance at the annual Ulster Bank Business Achievers Awards and it made for a tight schedule.

Surprisingly perhaps, it's the awards 'do' that has drawn the banker to Ireland, at least it's the reason he's decided to come now.

Sponsored by Ulster Bank and supported by the Irish Independent, it is the kind of thing that cynics dismiss as boosterism but it gets a huge response within the business community.


Stephen Hester relishes it. "Although its motherhood and apple pie, businesses exist only if they serve their customers well, so above all else banks need to move the agenda from their own financial stability onto what they are doing for their customers and more generally the encouragement of entrepreneurship and business success."

Disappointingly for him then, it is the state of the bank and its Irish unit in particular that we've come to talk about today.

Ulster Bank is the country's third biggest bank and the only major lender here not state-owned to some degree, at least not Irish state owned.

Since the crash RBS has pumped around £14.3bn (€16.8bn) into the Irish unit, a third of the cost of rescuing the entire global parent.

Why not just pull the plug?

"From the beginning we believed that Ireland has a positive future as an economy and that Ulster Bank's position within that should allow it to have a future too," Hester insists when the question is raised.

But for the first time he admits other options were considered.

"Keeping Ulster Bank was always 'Plan A' but of course we looked at alternatives. We would be neglectful if we didn't test our plan, but there has never been a moment in the last five years when leaving Ireland was the preferred option," he says.

If writing a cheque for €17.5bn was the good option the alternatives must have been stark.

Finding a buyer for Ulster Bank during the crash – Hester calls it the "smash" – was never likely.

That leaves a Bank of Scotland Ireland (BoSI) style exit, shutting the bank and selling its assets.

Ulster Bank was bigger and has deeper roots than BoSI. A pull out would have been disastrous for the economy.

It never happened, and now, as far as anything is foreseeable, RBS is here for the long haul, Stephen Hester says.

Even talk of splitting RBS into a good "core bank" and an IBRC style wind down vehicle would make no difference to that. Ulster is regarded as a part of the RBS "core," he says.

He rattles off the depth of connections between Ulster and RBS – the shared back offices and common products in the UK and Ireland as well as Ulster's North / South links.

Not that the status quo is entirely fixed. Earlier this year the bank looked to combine its separate corporate structure in Dublin and Belfast into a single, UK based entity.


The plan was aimed at making it easier to pump those UK billions into the Irish bank and was dropped because the situation at Ulster Bank stabilised thanks to rising customer deposits.

It had nothing to do with trying to escape the Irish regulator, Hester says. When it comes to the regulatory regime, "Ireland is neither more nor less strict than the UK," he points out.

These days regulators around the world are "sharing notes" and are all moving in the same direction, he says.

As he sees it the differences from country to country are about nuance, not major policies.

One area where the Central Bank here is pushing lenders hard is on tackling their mortgage arrears problems.

Arrears and the risk of more arrears is a huge issue for Ulster Bank. It has almost €24bn of Irish home loans on its books, much of it from the heady days of the boom.

Hester's bottom line is that to address the arrears issue, banks need to be able to recover money owed.

Given where we are, that means holding out a credible threat that where mortgages are not being repaid banks will repossess homes.

He's diplomatic about how that can be done.

"Banks have to go with the "grain of society, banks must behave in a way that people can tolerate, especially with an issue as difficult as this," he says.

There's a "but" coming.

And it's Hester's insistence that lenders have got to have the tools to ensure borrowers pay them back.

Read that as a swipe at the Government's failure to date to reverse the so called "Dunne judgement", a High Court ruling seen as the big impediment to forcing repossessions through the courts.

Isn't it unfair to penalise borrowers when it was the bank that made foolish lending decisions?

Hester says there is blame to go around.

"It is impossible for banks to argue that they did not make mistakes. Not just in Ireland," he says.

There is another "but" coming though.

"But, it is impossible to argue that banks were the only players. There has to be shared responsibility. You cannot force someone to borrow," he says simply.

RBS he points out, and by extension Ulster Bank survived the "smash" thanks to support from the UK government.

It's Hester's job to give that money back.

'Plan A' means in theory at least that some of that return will have to come from Ireland. Given the size of the rescue it looks like a big ask.

On that score Hester says things are getting better, but he has no illusions about the scale of the challenge.


"The numbers from the bank show a situation that is still bad but better than it was. It is beginning to turn," he says.

Ulster Bank continued to lose money in the first three months of this year, but the loss was 47pc less than the same time last year, he points out.

Crucially RBS is no longer funnelling huge sums into Dublin, largely because Ulster Bank is attracting more customer deposits, he points out.

Those deposits are attracted to Ulster Bank because of its ties to RBS, he points out but says it's still positive because it makes it easier for RBS to maintain those ties.

Having kept the bank open and now seeing Ulster Bank begin to stabilise, the next stage is to try to secure a return on capital, he says.

There's a certain amount that the bank itself can do, and is doing, he says.

That includes ending the disastrous reliance of Ulster Bank on IT systems at RBS and its sister UK operator NatWest, which led to weeks without proper service for hundreds of thousand of customers last year.

"The challenge is to try to make this a really good bank in all dimensions. We want to have a track record of doing things well," Hester says.

Real recovery, though, will come if and when the wider economy recovers, Hester says.

On that score his day in Ireland has been mostly positive. A rare outbreak of sunshine over Dublin and better then expected unemployment data from the CSO helped lift the mood.

Ireland has problems but is getting on with them, he says.

"There are encouraging signs that the process is beginning to have positive results.

"We all have to be clear there was a very big smash. It would be naive to think the recovery will be complete or rapid," he says.

"There are aspects of Ireland that even today are booming," he says.

He names agri-foods and the technology sector as examples.

"Other aspects will be painful and slow for some considerable amount of time."

Irish Independent

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