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Ulster Bank slashes loss estimates as economy recovers

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Ulster Bank: Photo: PETER MUHLY/AFP/Getty Images

Ulster Bank: Photo: PETER MUHLY/AFP/Getty Images

Ross McEwan, chief executive officer of the Royal Bank of Scotland Group Plc (RBS)

Ross McEwan, chief executive officer of the Royal Bank of Scotland Group Plc (RBS)

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Ulster Bank: Photo: PETER MUHLY/AFP/Getty Images

Ulster Bank has dramatically revised the scale of expected loan losses this year, betting that the rising economy and recovering house prices will boost its financial position.

Its parent Royal Bank of Scotland (RBS) said yesterday that it expects to beat previous guidance for £1bn (€1.3bn) of loan impairments this year.

The bank said it will reduce by £800m provisions set aside to cover losses on bad loans, after an improvement in economic conditions.

Loan losses at Ulster Bank will be £300m less than expected, and Irish problem loans are understood to make up a significant share of a £500m improvement at the RBS Capital Resolution (RCR) unit, an internal bad bank established by the lender.

That is because problem commercial property loans from here make up a disproportionately large share of the total RBS bad bank.

RBS shares rose sharply yesterday after it released the figures in a trading update ahead of a banking conference in London, where chief executive Ross McEwen was speaking.

"We're seeing a decisive turn in the economic cycle washing through the balance sheet of RBS," Mr McEwen told investors.

In Ireland, the improvement in the bank's finances reflects Ulster Bank's assessment of the value to its balance sheet of a bounce back in property values and a decline in the level of mortgage arrears.

"Rising Irish residential property prices combined with pro-active debt management has resulted in lower arrears in Ulster," the bank said. There is room for "further releases in future if market conditions continue to improve," according to RBS.

Ulster Bank returned to profit in the first half of this year, boosting its ability to begin returning some of the €16.8bn that the UK parent was forced to pump into the bank to cope with losses on boom era lending.

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In his presentation Mr McEwen told investors that some of the low margin assets that have been a drag on the bank, including Irish tracker mortgages that carry record low interests rates, have continued to run off. In other words, they are being reduced through repayment.

Analyst Ciaran Callaghan of Merrion Capital said the indications are that RBS will now retain Ulster Bank in order to benefit as the economy recovers.

"Although Ulster Bank's low-margin, risk-weighted, assets intensive back book of tracker mortgages are likely to constrain its ability to generate returns above the cost of capital, we expect RBS to remain committed to its Irish franchise over coming years in order to benefit from further recovery. It appears that this strategy is already reaping dividends, which bodes well for the future," he said.

Efforts by RBS to find outside investors to take over part of Ulster Bank appear to have been quietly dropped in recent months.

RBS shares jumped as high as 379.70 pence each in London on the back of the news, a rise of 3.6pc by 10:21 am yesterday. However, the stock finished the session at 368.20 pence each.


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