No clear route for merger to create third banking

The speculated Ulster Bank/Permanent TSB merger that would create a third banking force in the domestic market faces many challenges before it becomes a realistic proposition.

The Sunday Times reported over the weekend that Royal Bank of Scotland chief executive, Ross McEwan, was looking at a possible tie-up between Ulster Bank and another Irish-based bank. KBC and Danske Bank were both cited in the piece, although analysts have dismissed both of these as non-runners.

If Ulster Bank does go down the merger route to bolster its position in the Irish market, then PTSB would be the most obvious candidate. However, the future of the 99.2% State-owned bank hinges on the acceptance of its restructuring plan which is currently before the European Commission.

The plan would be to split PTSB into a good bank; an asset management unit that would wind down its troubled assets and a separate UK division that is up for sale.

One London-based banking analyst, who did not want to be named, said that if RBS was looking to move Ulster Bank off its balance sheet then the most appropriate course would be to engineer a reverse takeover of Ulster Bank by PTSB.

A private equity firm would then have to be sourced to invest in the new entity, which would allow RBS retain a minority stake in the company.

RBS could then treat its shareholding as an associate company and it would not have to consolidate its revenues and costs on its balance sheet. This would greatly help RBS meet its cost reduction targets.

However, Ulster Bank is on schedule to return to profitability this year. It will be 2016 at the earliest before PTSB turns a profit.

PTSB has €15bn of mostly loss-making tracker mortgages. A big chunk of this book as well as other non-performing assets are destined for the asset management unit if the restructuring plan is approved.

However, it is believed that there is no agreement on how the asset management unit would be funded. The ECB and the ESM are implacably opposed to the idea on the basis that it would pave the way for other banks with legacy assets and a negative carry trade to seek similar support.

It would be politically toxic for the Government to put in place a funding line for PTSB on the basis that it would be tantamount to another bank rescue.

As it stands, the bank is very well capitalised. However the sale of its UK €6.9bn loanbook at a loss will trim these capital levels. That is why support is crucial for the asset management unit. If this is forthcoming, then a merger with Ulster Bank would be possible and would make a lot of sense.