Ulster Bank’s ‘riskier’ business customers migrated towards non-bank lenders on its exit from Irish market

Central Bank research suggests presence of non-bank lenders in market reduced risk of a major credit supply shock following Ulster Bank’s exit

Non-bank lenders reduced the risk of a big credit supply shock for Irish businesses after Ulster Bank signalled three years ago that it was exiting the market, according to a Central Bank of Ireland paper.

The analysis also found that Ulster Bank’s “riskier” business customers were more likely to move to non-bank lenders as a result of the exit of the third-largest retail bank in the Republic, which is owned by UK-based NatWest Group.

Still, the paper concluded that Ulster Bank’s retreat “constituted a significant credit supply shock for its customers”, with those that borrowed from the lender in the two years before the announcement about 3 per cent less likely to receive a new credit agreement elsewhere in the following two years.

“The credit supply shock is sizeable given an average probability of obtaining a loan of 10 per cent in a given quarter for our sample of firms [across the market],” noted the report, co-written by Fergal McGann, head of function for financial resilience and research in the Central Bank.


“We also find evidence, however, of a substitution effect whereby non-bank lenders increased their lending to [former Ulster Bank business customers] and partially mitigated the impact of the credit supply shock.”

Drawing on extensive data from the Central Credit Register, where lenders are required to submit figures on loans with balances of more than €500, the research found that credit from Ulster Bank to firms started to fall from the time The Irish Times first reported in September 2020 that NatWest was considering winding down the Irish unit. NatWest confirmed in February 2021 that it was withdrawing from the Republic.

The Central Bank estimates that non-bank lenders, who typically specialise in asset finance and providing working capital, accounted for 30 per cent of small-business lending in the Irish market during 2019-2020, as AIB, Bank of Ireland and Ulster Bank dominated this area.

The Irish business debt market has been transformed over the past 15 years from one dominated by eight banks and a handful of alternative finance providers to one where there are only three surviving domestic banks, while more than 60 non-bank lenders are targeting various parts of the SME market.

However, international research consistently shows that non-bank lending is more cyclical than bank lending, largely due to the former’s reliance on wholesale and capital markets funding.

Permanent TSB took over Ulster Bank’s €165 million performing micro-SME book and €500 million asset finance portfolio this year as part of a wider deal also including mortgages and 25 Ulster Bank branches. AIB took over more than €2.9 billion of commercial and corporate loans from Ulster Bank.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times