More work needs to be done on future of Ulster Bank in Ireland

There was some positive news last Friday when Royal Bank of Scotland committed itself to Ulster Bank in the Republic following a strategic review that, in the words of RBS chief executive Ross McEwan, "looked at every option".

Competition is always a good thing and RBS's continued presence in the Irish market should help to keep AIB and Bank of Ireland on their toes.

It is also good news for the many small- and medium-sized businesses here who deal with Ulster, removing uncertainty about their banking facilities. However, a number of questions remain to be answered about its future in this market.

Results last Friday show Ulster Bank made a profit of £463 million in the first nine months of this year, aided by impairment releases totalling £261 million.

This compared with a loss of £520 million in the same period of 2013, when an impairment charge of £707 million was booked. Strip out the impairments and the results are a mixed bag. The bank’s operating profit fell by 6 per cent to £176 million. While its net interest income rose by 6.8 per cent to £486 million, total revenues declined by 4.7 per cent to £626 million. The bank shaved £20 million off its operating expenses but this was largely due to the fact a £25 million “litigation and conduct cost” did not reoccur this year.

In a conference call with analysts, McEwan said Ulster Bank in the Republic was a “good strategic fit” with RBS’s retail and commercial banking strategy, and was on a “path to producing positive returns in an economy which is recovering very fast”.

But a number of issues remain to be resolved. Will the business in the Republic operate separately from Ulster Bank in Northern Ireland? Will there be more branch closures and job cuts in the Republic? How does it plan to become a “challenger” bank here? McEwan made it clear that a lot of work remains to be completed before Ulster Bank would provide a suitable return for RBS’s shareholders.

He said Ulster Bank in Northern Ireland would become “more attached to our England and Wales [NatWest] business” and “we’ll run the Republic off our core [IT]systems with the same model”.

McEwan said the business in the Republic would become “more of a challenger bank” but failed to elaborate.

Traditionally, Ulster Bank has been considered the number three in the Irish market behind AIB and Bank of Ireland. Strip out market leader Northern Ireland and the picture becomes fuzzy.

When RBS's strategic review began in February, the strong view was it might seek to acquire State-controlled Permanent TSB and merge it with Ulster Bank. This bemused executives at PTSB, who said their bank had a bigger balance sheet than Ulster in the Republic. This is true although Ulster Bank has a stronger presence in the SME sector, a segment of the market PTSB is only now targeting.

Anyway, PTSB wants a market share of about 15 per cent of new lending. Is this what RBS means when it talks about Ulster being a challenger here?

McEwan made it clear last week Ulster Bank’s cost/income ratio is too high. RBS wants to get the figure to 60 per cent or below as against the 72 per cent figure now. RBS has pencilled in a four- to five-year timeframe to achieve a satisfactory return on capital for shareholders, McEwan told analysts.

Ellvena Graham, head of Ulster Bank in Northern Ireland, told BBC's Inside Business programme last week "branch closures are inevitable". She added: "We have 79 branches [in Northern Ireland]. Our closest competitor has 50. I do think that 79 is probably still too high."

In mid-2012, RBS indicated a branch network of 175 to 185 was likely by 2016 compared with the 214 at that point in time. This work has already begun.

The headcount was slated to reduce from 5,600 to somewhere between 4,000 and 4,500. It’s not clear from last week’s results if such cuts would get the cost/income ratio to the desired level.

In welcoming RBS's commitment to Ulster Bank, Larry Broderick of the Irish Bank Officials Association said it would provide "some comfort" to staff at the bank. This is an acknowledgement much detail on the future of Ulster Bank here needs to be worked out.

Ulster Bank might have been the “star performer” for RBS in its third quarter results but there’s still a long road to go before it’s a case of business as usual for the 178-year-old institution.

Twitter: @CiaranHancock1