Ulster Bank’s future in hands of RBS

An ongoing strategic review of Royal Bank of Scotland’s operations will determine the future of its Irish subsidiary Ulster Bank.

It is believed that three options are under consideration: close the bank; scale back to a much smaller operation; or take a wait and see approach.

Sources close to the situation say a closure is unlikely, even though Ulster Bank has been a source of major losses for its parent.

Whether Ulster Bank becomes a retail operation with a few ancillary services or once again becomes a fully functioning bank depends on the health of the Irish economy.

The Government will be hoping it becomes a third force in the domestic market along with AIB and Bank of Ireland.

But if it comes down to a political decision then it will be up to the British government. RBS is 82% state-owned and has had to pump £13bn into Ulster Bank over the last four years.

Rumours have circulated in recent weeks that any future corporate lending and other corporate services for Ulster Bank’s clients would be done out of London rather than Dublin.

Ulster Bank says there is no substance to rumours it is scaling down operations. A spokesperson said corporate lending continues to be done out of Dublin with a full team on the ground.

“I can see how this rumour came about, but it isn’t true” says a former senior executive with Ulster Bank. “They might not be doing much [corporate] lending, but neither is anybody else. There isn’t that much demand for credit. Corporates are still deleveraging.”

Another former executive says a closure is highly unlikely because RBS has already absorbed most of the losses. “The right time to close it would have been in 2008. Most of the losses will be worked through by 2013.”

If RBS takes the view that it is not going to put any more capital into Ulster Bank and the decision will be to keep it as a retail bank with a very limited amount of corporate and business banking services, then it will be a big blow to the economy. AIB will take a few years before it is back to full health and lending again.

HSBC and Barclays will both be serving the corporate market at the higher end, but there will be a huge demand for credit in the SME sector.

Another former executive says it makes more sense for RBS to make Ulster Bank as profitable as possible as this will be the only way of recouping the money it has lost since the Irish property market collapsed.

However, if RBS makes a decision to relocate as many Ulster Bank back office functions as possible to the UK in order to save on costs, then that will limit its sale potential in the future.

“If most of the back office functions are done by RBS, what you would be left with is a front office infrastructure. There would be very few in the market looking for a retail network — certainly not Bank of Ireland and AIB,” says the former executive.

International banking developments will also have a say on Ulster Bank’s future. The introduction of banking regulations known as Basel III means all banks have to have higher capital and liquidity ratios than they had in the past. It will also limit the amount of money RBS will be able to commit to Dublin.

Consequently, the amount Ulster Bank will be able to grow will be determined by how much it can invest which will depend on how much profits it is making. And that depends on the health of the economy.