Belfast Telegraph

Why Gerry's sudden move still leaves Ulster Bank better than he found it

The Belfast man’s decision to leave for Tesco Bank after 18 months puts future of Ulster Bank in the Republic in the spotlight again, says Dan White

Gerry Mallon's sudden decision to quit as boss of Ulster Bank in the Republic after just a year-and-a-half in charge has inevitably raised questions about the bank's future. No one saw it coming. Last Wednesday, Mallon, who had been in situ for less than 20 months, announced that he was leaving Ulster Bank to head up Tesco Bank.

Everyone was being very polite. Les Matheson, head of personal and business banking at Ulster's UK parent RBS, praised Mallon for his "significant contribution" to the recovery in Ulster Bank's fortunes.

In a further sign that all parties are determined to remain on the best possible terms, Mr Mallon will stay in the job until mid-year to give RBS time to find a suitable successor.

According to Mr Mallon, who was also chief executive of Danske Bank from 2008 to 2016, the decision to accept the Tesco job offer had been "an enormously difficult one" but that it represented "an excellent opportunity" for him and his family.

While there is no single right way to manage sudden executive departures, Ulster Bank and Mr Mallon seemed to have handled the situation as well as can be expected. Still, Mr Mallon's decision to jump ship after such a short period at the helm once again raises questions about Ulster Bank's future in the Republic. Its Northern Ireland operations have more or less been separated from its operation in the Republic.

In the aftermath of the crash a slew of foreign-owned banks, including HBOS and Danske, exited the Irish market.

The exodus of the foreign-owned banks inevitably led to speculation that Ulster Bank, which is owned by UK bank RBS - itself 70% owned by the British government - would follow suit.

While RBS definitely contemplated getting rid of Ulster Bank earlier in the decade, the bank is now adamant that it is in Ireland for the long haul.

"Ulster Bank is part of the bank [RBS]. It's not for sale", said RBS chief executive Ross McEwan in October 2016.

Originally founded in 1836, Ulster Bank has traditionally been an all-island institution. That changed in January 2017, when Ulster Bank Ireland was hived off from the rest of Ulster Bank. It was listed in the 2016 Ulster Bank annual report as a "discontinued operation" and as the "disposal group".

An unfortunate choice of words for a bank seeking to damp down sale rumours.

So does this most recent corporate manoeuvre indicate that a sale of Ulster Bank's Irish operations is back on the RBS agenda? Not according to an Ulster Bank spokesman, who points out that the move was dictated by the need to bring the Irish business inside its "ring fenced" core activities - RBS is legally obliged to separate its core banking operations, which will be ring-fenced, from its riskier non-core activities, which won't, by the beginning of 2019.

At the end of 2016 Ulster Bank had a Republic of Ireland balance sheet of €30.6bn and a loan book of €22bn, down from €22.5bn at the end of 2015. However, Ulster Bank is struggling to turn a profit in the Republic - with the bank going from an operating (pre-interest) profit of €163m in 2015 to a loss of €106m in 2016. Only a loan write-back of €138m allowed it to sneak into the black in 2016.

The going continued to be tough for Ulster Bank in 2017, with an operating profit of just €12m being recorded in the first six months of the year. While it managed to shave another €70m (15%) off its operating expenses, its income also fell by €36m (10%).

However, the news from Ulster Bank isn't all disappointing. In common with all of its competitors it was clobbered by the crash with its balance sheet having halved over the past decade and its shareholders, mainly the British government, having had to inject over £15bn to cover loan losses and keep it in business.

With the Irish economy growing strongly once again, loan losses are now a thing of the past, indeed it is now writing back loans it had previously written off with €929m of write-backs in 2015 and a further €138m in 2016.

This combination of a recovering economy and loan write-backs means that Ulster Bank is now stuffed to the gills with surplus capital. But is this as good as it gets for Ulster Bank and the other banks operating in Ireland? While the Irish economy has been growing strongly since 2013, this renewed economic growth has taken its time filtering through to the banks.

The most recent monthly banking statistics from the Central Bank show a banking system that is, at best, ticking over.

While, after bottoming out in the second and third quarters of 2017, lending to Irish households is finally growing once again, with a 1.8% increase to €91.3bn being recorded in the 12 months to November 2017, other types of lending are still falling. Total lending to non-financial companies fell by a further 5% to €41.9bn, while bank lending to insurance companies, pension funds and other financial intermediaries was down by 15% to €47.5bn.

Add it all up and, despite the domestic economy growing at close to 5%, total bank lending fell by a further 5% to just over €181bn in the 12 months to November 2017 and now stands at less than half of its 2008 peak of almost €400bn.

Even the increase in lending to households should come with a health warning attached. Ulster Bank is one of the banks which grew its mortgage book in 2017, predicting at the time of the publication of its half-year results in August that it would lend over €1bn in new mortgages in the full year.

So did Mr Mallon decide to get out while the going was still good? This isn't the first time that he has changed horses in mid-stream.

He is also chairman of the Irish Football Association. During his six-year tenure skippering the organisation, the recurring tensions between the IFA and its southern counterpart the FAI over the latter's occasional 'poaching' of Northern Ireland-qualified players have eased considerably.

"Mallon was looking at an opportunity that was going to pay him twice as much. With Tesco he will be operating in a market that is not as highly politicised and has a lot more players," said one long-time Ulster Bank-watcher.

Even when one takes into account the continuing difficulties afflicting the Irish banking market, Mr Mallon leaves Ulster Bank in considerably better shape than he found it.

Dividends have been restored, non-performing loans are down and the risk profile of the bank has been greatly reduced.

However, the bank's profitability is still inadequate for a bank with a €30bn balance sheet. How to grow the loan book and raise profits will be the challenge facing the next man, or woman, to take charge at Ulster Bank.

Branch closures part of legacy

One of Gerry Mallon's most visible legacies at Ulster Bank in the Republic is a greatly truncated branch network, with a further 22 closed in 2017.

The most recent closures followed the shutting of 10 branches in 2013 and 14 in 2015. The latest round means Ulster will have closed 46 in the space of just five years, a third of its total network, which has now shrunk to just over 90 outlets.

Mr Mallon defended the most recent round of branch closures by pointing out that only 10% of customer 'interactions' now take place in branches and that 62% now occur digitally.

Danske Bank has also closed a large number of its branches. The bank announced two closures last year, bringing its numbers to 44. Those were its first closures since 2014.

Belfast Telegraph

Weekly Business Digest Newsletter

This week's business news headlines, directly to your inbox every Tuesday.