Analysis: Legacy issues weigh on new Ulster Bank chief

Legacy issues continue to weigh heavily on Ulster Bank's operation in the Republic.

The bank, which now operates separately from Ulster Bank in the North, announced a headline adjusted profit of €155 million for the first half of 2016.

This was down from €199 million in the same period of last year and reflected a reduced level of impairment releases.

However, when you factor in restructuring costs of €32 million and a provision of €118 million to deal with the Central Bank’s review of tracker mortgages, the surplus becomes a skinny €9 million.

Consumer protection code

The bank was put on notice in April by the regulator that it will face sanctions for “suspected breaches” of the consumer protection code between August 4th, 2006, and June 30th, 2008, in relation to certain customers who switched from trackers to fixed-rate mortgages.

For now, Ulster Bank is not providing numbers on how many customers were overcharged on their interest rates or how many lost their homes.

It said the process is complex and would take a number of months to work through.

Of course, Ulster Bank isn't alone in this issue. AIB has set aside €190 million, while Permanent TSB has provided €140 million for its mortgage redress scheme, which made the headlines last year.

But the emergence of this issue is embarrassing for a bank that has set itself the goal of being number one in the market for trust.

It's not the most helpful introduction for Gerry Mallon, who took over as chief executive in June and is left to pick up the pieces. It will be interesting to see how he puts his own stamp on the business in the years ahead.

Cost-income ratio

The results also show that Ulster Bank’s cost-income ratio in the first half of the year reduced to 67 per cent from 74 per cent when the costs of restructuring and the tracker review are excluded.

If these costs are included, the ratio balloons to 106 per cent from a comparable 77 per cent.

The bank’s net interest margin, a key indicator or profitability, reduced to 1.64 per cent from 1.66 per cent a year ago.

The bank said underlying business income growth, driven by progressive repricing of deposits and new business lending, was more than offset by reduced income on free funds, contributing to the margin reduction.

New mortgage lending

On a positive note, its share of new mortgage lending rose to 18 per cent from 14 per cent in the first quarter of 2015, a trend that is thought to have broadly continued in Q2.

This strong performance was supported by a successful re-entry into the broker market, competitive mortgage rates and the expansion of its mobile mortgage manager team, the bank said.

Once again, Ulster Bank’s results are something of a mixed bag, overshadowed by legacy conduct issues.

Brexit also hangs in the air but this might actually turn out to the a positive given that Ulster Bank in the Republic will effectively be Royal Bank of Scotland’s passport into the European Union. And it should be well placed to win business from any international companies that decide to relocate operations from the United Kingdom to Ireland.