Ulster Bank bad loans charge falls sharply

THE CHARGE to cover bad loans at Ulster Bank’s main and wind-down divisions fell 54 per cent to £1.166 billion (€1.45 billion) in the first half of the year as the rate of increase in loan arrears declined.

Reporting results for the six-month period, the bank’s parent, Royal Bank of Scotland, said the decrease also reflected the heavy writedown on property development loans taken at Ulster Bank in the first half of last year.

Ulster Bank has been split into core loans of £33 billion, including mortgages of £19.2 billion, and non-core loans of £13.4 billion, comprising mostly property loans, which will be run down over time.

Impairments on core loans fell 18 per cent in the second quarter to £323 million on the previous quarter as the increase in mortgage arrears and decrease in residential properties prices slowed.

Ulster Bank chief executive Jim Brown said loan impairments had peaked but would remain high.

“We are still in a difficult market so losses are going to remain elevated for some time,” he told The Irish Times.

The bank has agreed forbearance measures on 14,000 of the bank’s 150,000 residential mortgages, or 10 per cent by value of loans, helping borrowers to make repayments as arrears continue to increase though more slowly in the second quarter of the year.

“The rate of arrears is still climbing but it is slower,” said Mr Brown. The peak in arrears “wasn’t too far away” but he wouldn’t put an exact timing on it.

“We need to see how the new personal insolvency legislation plays out,” he said.

The bank expects residential property prices to fall by between 55 and 60 per cent from peak to trough. Property prices have so far halved since their peak in 2007.

The second-quarter operating loss rose to £245 million from £178 million on the same period in 2011 but fell from £310 million in the first quarter of this year.

The net interest margin, the difference between what the bank pay for funding and charges for loans, was squeezed by 5 basis points to 1.82 percentage points in the second quarter of this year.

Ulster Bank recently reduced its standard variable rate by a quarter of a percentage point but it is still the highest in the market. Mr Brown said he didn’t see the bank reducing the rate again “unless our funding costs come down”.

Ulster Bank has received £13 billion (€16.25 billion) from RBS, the head of UK corporate banking at RBS, Chris Sullivan, told an Oireachtas committee last month. This has increased from £10 billion at the end of last year.

Bad debts across both core and non-core loans totalled £512 million in the second quarter, down 22 per cent on the earlier quarter.

Core loan impairments stood at £717 million for the first half of the year, down from £730 million for the same period last year.

Mr Brown declined to comment on the settlement of a legal action with property developer David Agar in which he claimed the bank had mis-sold him interest rate swaps and loans worth €30 million. This amount was reportedly written off by Ulster Bank.

RBS took a provision of £50 million for interest rate swap mis-selling in the first half of the year.

Ulster Bank would participate with RBS in an industry review by the UK regulator into the sale of interest rate hedging products since 2001 to small and medium-sized customers, Mr Brown said.

Non-core loans fell by £200 million as properties were sold by the bank. Mr Brown said the bank would look at “bundling up” properties into small portfolios for sale.

Customer deposits at Ulster Bank declined by £600 million during the first half of the year.

RBS said £6.2 billion or 18.8 per cent of Ulster Bank’s £33 billion in core loans had “risk elements”.

Mr Brown said the bank’s 236-branch network in the Republic was still under review.