John Whelan: Why small firms will be worst hit as Ulster Bank pulls out
The announcement by NatWest that it would be phasing out its Ulster Bank operations in Ireland will put a shiver down the backs of the 40,000 small businesses scattered across the country. Picture: Brian Lawless/PA
Michael Carey, former chairman of Bord Bia, was part-financed by Ulster Bank when he decided to start up a new company, East Coast Bakehouse, back in 2016.
Despite his own track record in running Jacob Fruitfield Food Group and pumping a large chunk of his own cash into the new venture, the search for bank funding was particularly torturous, he told a business audience.
Chasing around all the banks at the time — and there were more of them around than now — he found them to be risk-averse, with only one prepared to offer the necessary funds.
Back then without Ulster Bank, Mr Carey may not have been able to get his new company off the ground.
Right now, the announcement by NatWest that it would be phasing out its Ulster Bank operations in Ireland will put a shiver down the backs of the 40,000 small businesses scattered across the towns and villages, who rely on Ulster for their daily banking needs.
This makes its exit much more significant than any of the other overseas banks, including Bank of Scotland, Rabobank, and Danske Bank, who exited the Irish retail banking market since the financial crash.
Pandemic-related turmoil has wrought havoc on balance sheets of small businesses across Europe as well as Ireland in the last year.
The survival of many of these businesses will depend on Government assistance both this year and next.
Much of the financial assistance provided by the State will be delivered through the banking network.
Governments that manage this best will reap the rewards of lower unemployment and faster economic growth.
Regrettably, the NatWest decision to close down Ulster Bank in the Republic, albeit a "phased withdrawal over the coming years", sends a signal to the Government not to expect too much tender loving care from that quarter for the many small businesses who, through no fault of their own, have been forced to lock down their businesses for much of the last 12 months.
The State is a key player in the Irish banking sector, with a 14% stake in Bank of Ireland and a majority shareholding in both AIB and Permanent TSB.
Hence, it must devise a master plan for the future of banking in Ireland. And it must move fast.
The Wall Street investment bank Goldman Sachs, which has been advising NatWest on its strategic review into Ulster Bank’s future, is currently engaged to varying degrees with a number of parties interested in elements of the loan book, including AIB, Permanent TSB, and non-bank lenders, the so-called vulture funds.
It has already advised on a potential sale of €4bn of Ulster Bank's commercial loans to AIB and is in discussions with Permanent TSB about a possible sale of other loans.
As part of its so-called retail-focused business, Ulster Bank has about a 15% share of the mortgage market in the Republic and a significant chunk of small business lending, as well as having a strong corporate banking business.
This makes it of systemic importance to the future of the Irish economy.
Dealing with Ulster Bank’s almost €22bn in deposits will also be a major challenge at a time when AIB and Bank of Ireland are holding excess customers’ deposits and are being charged negative rates by the ECB on surplus cash deposited with it.
The financial engineering around the loan sales may lessen the concerns over Ulster's deposits.
Nonetheless, there is a risk of the existing banks being swamped with unwanted Ulster Bank deposits, likely resulting in negative interest rates being charged more widely, hitting small businesses particularly hard.
Former State-owned banks ICC and ACC are good examples.
In the case of the ICC development bank, it tapped funding from the European Investment Bank, EIB.
It was a key provider of commercial loans and banking services to the small business sector for 70 years until its sale to Bank of Scotland around 20 years ago.
ACC, the Agricultural Credit Corporation, was sold soon after to Rabobank, after many years of successful State ownership.
Regrettably, both banks exited the Irish markets following the financial crash.
Rabobank sold the remaining loans of its former ACC bank unit to Goldman Sachs in 2019.
Buying Ulster Bank is one option the State must consider seriously, as a key resource to enable the small business sector to successfully resume business post-lockdown.
The involvement of Government-owned banks Permanent TSB and AIB in carving up some of the Ulster Bank loans shows that the State is approaching the problem through this strategy.
It may need to do much more.
However, it will not come cheap as, besides the cost of purchasing the primary assets of Ulster Bank, there will be a call on resources to manage likely fallout from Covid-19 loan defaults.
NatWest indicated that Ulster Bank had set aside significant amounts to deal with loan defaults from the Covid crisis.
However, the State, having too large a presence in the banking sector, is unlikely to be to the advantage of businesses or the State in the longer term.
An early sale of the Government's stakes in AIB and Bank of Ireland appears to be off the table, Finance Minister Paschal Donohoe has indicated.
Amid the pandemic, bank valuations in Ireland and across the rest of Europe are well below their asset value.
For instance, at €1.74, AIB shares are significantly below the price the Government last sold a slice of its AIB stake, in 2017.
Recommendations contained in the recent National SME and Entrepreneurship Growth Plan give a clear indicator of elements of a master plan that should be adopted.
These included attracting foreign banks to set up in Ireland and bolstering credit schemes from various Government-backed agencies.
The recommendations also included setting up a State-owned business bank focused on lending to Irish small firms and saw a role for tapping European funds.
- John Whelan is managing partner at the Linkage-Partnership, a consultancy to Irish businesses.
