Decision on Ulster Bank in three weeks

A decision on the future of Ulster Bank will be made within three weeks, according to the UK chancellor George Osborne.

There are three options on the table, says to the Daily Telegraph:

* Split Royal Bank of Scotland into a good bank/bad bank, with the bad bank staying inside RBS;

* Split RBS into a good bank/ bad bank with the bad bank set up as a separate entity and funded by the Bank of England;

* Or the chancellor could set up a toxic bank, funded by the taxpayer, with RBS’s troubled assets put into this bank.

A Telegraph editorial on Saturday urged Osborne to place Ulster Bank into the bad bank. It said that RBS “must take some painful steps. For instance, the bank’s Irish arm, Ulster Bank, should probably be placed in its entirety into the bad bank, along with its US banking operations.”

This would have huge implications for the Irish economy. There has been speculation that the previous chief executive of RBS, Stephen Hester, had looked to close down Ulster Bank as part of a group-wide restructuring.

However, this option was ruled out because there was an agreement between Finance Minister Michael Noonan and Osborne that Ulster Bank would not be closed down. Both sides denied any such agreement exists.

The UK exchequer hired the investment bank Rothschild and the asset manager Blackrock to advise it on options for RBS. Blackrock has identified between £50bn and £60bn (€59bn and €70.8bn) of non-core assets that could be put into a bad bank.

A senior banking source says this figure would suggest only Ulster Bank’s troubled assets would be put into the bad bank. “There are already roughly £38bn of non-core assets earmarked for the bad bank. Ulster Bank’s balance sheet is roughly £50bn so this would suggest that only Ulster Bank’s toxic assets are heading for the bad bank,” the source said.

Goodbody Stockbroker analyst Eamonn Hughes said in a research note there are a few possible outcomes. “At a minimum, it appears that the €13bn of non-core loans in Ulster Bank will end up in whatever bad bank format is agreed.

“The debate in the coming weeks will centre on whether any more Ulster loans end up in the bad bank or indeed all of it in an extreme scenario (would be good news for domestic Irish banks) or whether an attempt is made to sell the core Ulster Bank (would bring in new entrant).”

Mr Hughes added: “We anticipate RBS will retain the core Ulster Bank (one-third market share in Northern Ireland and number three player in the republic) just as margins are improving and noting that Ulster’s mortgage arrears peaked over the summer which should contain its problems.”