Saturday 15 December 2018

Mallon's sudden departure raises new questions about Ulster Bank's future

The CEO's unexpected decision to leave for Tesco Bank after a year-and-a-half in the role puts its destiny in the spotlight again

Ulster Bank’s offices in Dublin, where the big question for the future is how to increase profitability
Ulster Bank’s offices in Dublin, where the big question for the future is how to increase profitability

Dan White

Gerry Mallon's sudden decision to quit as Ulster Bank boss after just a year-and-a-half in charge has inevitably raised questions about the bank's future. No one saw it coming. Last Wednesday, Mallon, who had been in situ for less than 20 months, announced that he was leaving Ulster Bank to head up Tesco Bank in the UK.

Everyone was being very polite. Les Matheson, head of personal and business banking at Ulster's UK parent RBS, praised Mallon for his "significant contribution" to the recovery in Ulster Bank's fortunes.

In a further sign that all parties are determined to remain on the best possible terms, Mallon will stay in the job until mid-year to give RBS time to find a suitable successor.

According to Mallon, the decision to accept the Tesco job offer had been "an enormously difficult one" but that it represented "an excellent opportunity" for him and his family.

While there is no single right way to manage sudden executive departures, Ulster and Mallon seemed to have handled the situation as well as can be expected. Still, Mallon's decision to jump ship after such a short period at the helm once again raises questions about Ulster Bank's future. In the aftermath of the crash a slew of foreign-owned banks, including HBOS and Danske, exited the Irish market.

The exodus of the foreign-owned banks inevitably led to speculation that Ulster Bank, which is owned by UK bank RBS - itself 70pc owned by the British government - would follow suit.

Gerry Mallon is heading to Tesco Bank in the UK, where it is believed he will be able to double his pay package
Gerry Mallon is heading to Tesco Bank in the UK, where it is believed he will be able to double his pay package

While RBS definitely contemplated getting rid of Ulster Bank earlier in the decade, the bank is now adamant that it is in Ireland for the long haul.

"Ulster Bank is part of the bank [RBS]. It's not for sale", said RBS chief executive Ross McEwan in October 2016.

Originally founded in 1836, Ulster Bank has traditionally been an all-island institution. That changed in January 2017, when Ulster Bank Ireland was hived off from the rest of Ulster Bank. It was listed in the 2016 Ulster Bank annual report as a "discontinued operation" and as the "disposal group".

An unfortunate choice of words for a bank seeking to damp down sale rumours.

So does this most recent corporate manoeuvre indicate that a sale of Ulster Bank's Irish operations is back on the RBS agenda? Not according to an Ulster spokesman, who points out that the move was dictated by the need to bring the Irish business inside its "ring fenced" core activities - RBS is legally obliged to separate its core banking operations, which will be ring-fenced, from its riskier non-core activities, which won't, by the beginning of 2019.

At end of 2016 Ulster Bank had a Republic of Ireland balance sheet of €30.6bn and a loan book of €22bn, down from €22.5bn at the end of 2015. However, Ulster is struggling to turn a profit in the Republic - with the bank going from an operating (pre-interest) profit of €163m in 2015 to a loss of €106m in 2016. Only a loan write-back of €138m allowed Ulster to sneak into the black in 2016.

The going continued to be tough for Ulster in 2017, with an operating profit of just €12m being recorded in the first six months of the year. While Ulster managed to shave another €70m (15pc) off its operating expenses, its income also fell by €36m (10pc).

When explaining the "modest" first-half operating profit figure, Mallon pointed out that it had been hit by one-off restructuring costs. Mallon's favourite yardstick of Ulster's profitability is "adjusted operating profit", which was €104m in the first half. Unfortunately this figure was also down, by a third from the €155m recorded in the first six months of 2016.

However, the news from Ulster isn't all disappointing. In common with all of its competitors it was clobbered by the crash with its balance sheet having halved over the past decade and its shareholders, mainly the British government, having had to inject over £15bn into the bank to cover loan losses and keep it in business.

With the Irish economy growing strongly once again, Ulster's loan losses are now a thing of the past, indeed it is now writing back loans it had previously written off with €929m of write-backs in 2015 and a further €138m in 2016.

This combination of a recovering economy and loan write-backs means that Ulster is now stuffed to the gills with surplus capital. At the end of June Ulster had a Common Equity Tier 1 (CET1) capital ratio of 30.5pc as compared to the 10.8pc-11.8pc target set by the Basel III international banking rules. This meant that no-one was surprised when it recently paid RBS a €1.5bn dividend, coming after the previous €1.5bn dividend paid to RBS a year ago, it has now repaid €3bn to its parent.

That's still only about a sixth of the total of £15bn (about €17bn at the current exchange rate) RBS pumped into Ulster following the crash but it does seem to bode well for the future.

But is this as good as it gets for Ulster and the other banks operating in Ireland? While the Irish economy has been growing strongly since 2013, this renewed economic growth has taken its time filtering through to the banks.

The most recent monthly banking statistics from the Central Bank show a banking system that is, at best, ticking over.

While, after bottoming out in the second and third quarters of 2017, lending to Irish households is finally growing once again, with a 1.8pc increase to €91.3bn being recorded in the 12 months to November 2017, other types of lending are still falling.

Total lending to non-financial companies fell by a further 5pc to €41.9bn while bank lending to insurance companies, pension funds and other financial intermediaries was down by 15pc to €47.5bn.

Add it all up and, despite the domestic economy growing at close to 5pc, total bank lending fell by a further 5pc to just over €181bn in the 12 months to November 2017 and now stands at less than half of its 2008 peak of almost €400bn. Even the increase in lending to households should come with a health warning attached. Virtually all of the increase in lending to households was due to an increase in mortgage lending, which grew by 2.5pc to €76.2bn.

Ulster Bank is one of the banks which grew its mortgage book in 2017, predicting at the time of the publication of its half-year results in August that it would lend over €1bn in new mortgages in the full year.

With average house prices rising by 12pc a year, is Ulster at risk of over-exposing itself to an over-heating residential property market?

With the possible exception of mortgages, bank lending to most sectors of the economy is much lower than one would normally expect it to be. Irish households are now net lenders to the banking system with households having almost €9bn more in deposits than loans. Ten years on from the crash, Irish households and businesses are still extremely reluctant to lend.

All of which begs the question: Is this the apex for Ulster Bank in the Republic? Is its future one of low loan growth and the gradual extraction of the surplus capital that RBS pumped in during the crisis years?

Further complicating matters is the tracker mortgage scandal in which Ulster has played a full and inglorious role. Last October, Mallon was taken to task by TDs and Senators when he revealed to the Oireachtas Finance Committee that the number of customers who were found to have been wrongly taken off their tracker rate had risen from 2,000 to 3,500, of whom only 1pc had been refunded.

Despite having already set aside €211m to meet the costs of the tracker scandal, this sorry affair is likely to act as drag on Ulster's profitability, not to mention an endless source of bad publicity, for the foreseeable future.

So did Mallon decide to get out while the going was still good? This isn't the first time that he has changed horses in mid-stream. Prior to joining Ulster as CEO of its Republic of Ireland business in June 2016 he had been boss of Danske in Northern Ireland.

He is also chairman of the (Northern) Irish Football Association. During his six-year tenure skippering the organisation, the recurring tensions between the IFA and its southern counterpart the FAI over the latter's occasional 'poaching' of Northern Ireland-qualified international players have eased considerably.

"Mallon was looking at an opportunity that was going to pay him twice as much. With Tesco he will be operating in a market that is not as highly politicised and has a lot more players," said one long-time Ulster Bank-watcher.

Even when one takes into account the continuing difficulties afflicting the Irish banking market, Mallon leaves Ulster in considerably better shape than he found it.

Dividends have been restored, non-performing loans are down and the risk profile of the bank has been greatly reduced.

However, Ulster's profitability is still inadequate for a bank with a €30bn balance sheet. How to grow the loan book and raise profits will be the challenge facing the next man, or woman, to take charge at Ulster.

Branches slashed

One of Gerry Mallon's most visible legacies at Ulster Bank is a greatly truncated branch network, with a further 22 closed in 2017.

The most recent closures followed the shutting of 10 branches in 2013 and 14 in 2015. The latest round means Ulster will have closed 46 in the space of just five years, a third of its total network, which has now shrunk to just over 90 outlets.

Mallon defended the most recent round of branch closures by pointing out that only 10pc of customer 'interactions' now take place in branches and that 62pc now occur digitally.

That may well be true - but it didn't lessen the genuine anger felt in many towns and villages, which saw their local branch shut for the last time, and among the 220 staff who lost their jobs as a result.

The closures are part of a pattern that has seen well over 200 bank branches shut for good over the past decade.

With only Bank of Ireland having so far resisted the trend towards large-scale branch closures, how long will it be before new boss Frances McDonagh follows her competitors' lead?

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