The Ulster Bank has outlined its business strategy to restructure and return to profitability. Further redundancies and some branch closures will be needed.
For the last four years the bank has reported annual losses on an all-island basis which, although now much smaller, still exceeded £2bn in 2012. To maintain the Ulster Bank, the Sunday Business Post has quoted that the parent company RBS has injected an additional £14.3bn into its capital.
The bank, first, needs to trade its way out of incurring impairment charges on loans in default and, second, needs to restructure to generate an improved balance of revenue and costs, giving an acceptable level of profitability.
Even if impairment charges are removed, the current trading performance of the bank today would be commercially inadequate.
In reply to criticism about a lack of funds available for businesses, Ellvena Graham, Ulster Bank chief operating officer, said: “We are genuinely open for business. If a customer wants to talk about a good business proposition, we do have money to lend.”
A new feature of the Ulster Bank here is that, drawing on the Bank of England’s Funding for Lending Scheme, £80m has been offered to over 500 businesses at more attractive interest rates.
But is the bank too risk averse? Given the need to rebuild profitable operations, Ms Graham has a reply that reflects the tensions of the recent serious learning experience. “We took too much risk in the past. There is now a balance to be struck.”
In 2012, the Ulster Bank annual accounts, including the non-core business, show that in the Republic of Ireland the bank had an operating loss of £1.501bn. In Northern Ireland the operating loss was £590m.
The operating loss for the core business here was £112m. This was after impairment charges of £213m so that excluding impairments the bank in Northern Ireland made a profit of £101m.
These details confirm for normal banking it was trading profitably on both parts of the island. However, that level of profit is well below an acceptable return on the capital invested. There is, therefore, no surprise that the bank, north and south, is seeking to increase revenue earned and reduce operating costs.
On an all-island basis, Northern Ireland generated nearly one-third of the bank’s core business. Northern Ireland in 2012 generated 30% of the customer deposits (£6.7bn) and was carrying just under 19% of all loans and advances (£6bn).
The differences suggest that the core business in Northern Ireland might be described as having a capacity to increase its lending. The ratio of lending to deposits at the end of 2012 was 80%. In contrast, the same ratio for core business in the Republic was 152%.
The net income margin on Northern Ireland business was a more attractive 3.06%, compared to only 1.63% south of the border.
To rebuild profitability a critical yardstick is the ratio of operating costs to net revenue earned. The evolving business strategy is to reduce the ratio of costs to revenue from the present level of 62% to somewhere nearer to 50%-55%. If half of that adjustment was to come from operating costs and the target was to reach 55%, then in Northern Ireland operating costs might need to reduce by about 8%, or £12m each year.
The challenge facing the Ulster Bank in Northern Ireland is formidable. More impairment must be managed out of the balance sheet and, in addition, operating costs must decrease. Financial and human management skills will be well tested.
If a customer wants to |talk about a good business proposition, we do have money to lend