Monday 23 October 2017

Ulster Bank needs white knight

Lender "just isn't viable" on its own - analyst - Major bank group seen as ideal suitor

Ulster Bank HQ in Dubin.
Ulster Bank HQ in Dubin.
Colm Kelpie

Colm Kelpie

Ulster Bank is not viable as a stand-alone institution, but would benefit from being taken over by a major banking group with access to cheap money, according to a senior analyst.

The country's third biggest bank is currently part of Royal Bank of Scotland (RBS). But its UK government-owned parent is seeking outside investment it says the Irish unit needs in order to challenge AIB and Bank of Ireland.

Amid speculation of a potential management-supported private equity buyout of Ulster, banking analyst Ciaran Callaghan said the cost of funding was likely to pose the biggest challenge to such a deal, which would create a stand-alone bank.

"Ulster on its own, given its trackers, given its high cost base, it just isn't viable," Mr Callaghan told the Irish Independent.

"Permanent TSB is facing the same issues."

A beneficial deal would see Ulster taken over by a large bank such as Spain's Santander that has access to low cost finance, Mr Callaghan said.

Ulster's parent RBS, which has pumped €15bn into its Irish wing, is casting around for investors for the Irish lender, which made a profit in the first quarter for the first time in five years. Speculation at one stage centred on a possible merger between Ulster and Permanent TSB.

"At present, Ulster Bank benefits from funding assistance from its parent which helps to keep the bank's liability costs low," Mr Callaghan, of Merrion Capital, wrote in a note to investors.

"Pre-provision profits are likely to be adversely impacted if the new entity is forced to fund itself independently going forward in our view, potentially undermining its capacity to become a viable lender to the economy." He said there were also funding challenges posed by Ulster's high cost base and low yielding tracker mortgages, which he said accounted for 68pc of its loan book.

Both Ulster Bank and Permanent TSB are robustly well capitalised and under no funding or financial pressure. Ulster Bank currently benefits from being owned by banking giant RBS, while Permanent TSB is State owned. Ulster declined to comment while PTSB said they looked forward to publishing their half year results next month which will update the market on progress being made on its strategic objectives.

Spain's Santander has just lost out on a bid for Catalunya Banc, which sold to Spain's second-biggest bank BBVA for just under €1.2bn.

BBVA beat rivals Santander and Caixabank, which had also submitted bids last week.

Catalunya, one of several banks rescued in the aftermath of Spain's property market collapse, was slimmed down before it was sold. The sale was seen as one of the last opportunities for healthier lenders to pick up some of the spoils of the crisis at a bargain price.

Ulster and PTSB are two of the five banks due to be 'stress-tested' in the autumn before the European Central Bank takes over as Europe's banking supervisor. The other banks being examined here are AIB, Bank of Ireland and the Irish-based operations of global bank Merrill Lynch.

The 'Irish Examiner' yesterday reported that a management-supported private equity takeover of Ulster Bank is being considered by RBS, which would see a private equity firm, either KKR or Apollo, taking over Ulster Bank while maintaining the current management team.


"Ahead of the [stress test] exercise, the RBS subsidiary had the smallest capital buffer of the Irish banks with a CT1 ratio of 11.5pc at Dec 2013 year-end, compared to AIB (15pc), PTSB (13.5pc), BoI (12.3pc)," Mr Callaghan said. "While it returned to profitability in Q1 2014, Ulster Bank's large back book of low yielding tracker mortgages is set to constrain future earnings potential."

Goodbody Stockbrokers said Ulster Bank would be a potentially attractive asset.

"Ulster Bank returned to profitability in Q1 this year and we are anticipating a full year positive out-turn, similar to AIB and BOI," said analysts Eamonn Hughes and Colm Foley.

The Irish Bank Officials Association said clarity was needed from Ulster Bank bosses for staff.

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