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No easy way to get Ulster Bank out of the red soon

The Ulster Bank has been seriously affected by bad debts and provision for bad debts caused by the poor performance of a large part of its lending to customers on the island of Ireland, north and south.

In recent years, the parent company of the Ulster Bank, the Royal Bank of Scotland (RBS), has been massively supported by the UK taxpayer. As the RBS gradually moves back towards becoming a profitable organisation with the potential to repay some of the government funds, the spotlight has focused on the parts of the bank still giving cause for concern. No surprise, then, that Chairman of the RBS, Sir Philip Hampton has described the performance of the Ulster Bank as his single biggest worry.

He has underlined the impairment of over £11bn that has been recognised in the Ulster Bank and has drawn attention to the injection of new capital of some £6bn.

The scale of these different forms of support is large when compared to the size of the bank balance sheet. At the end of March 2012, customer's deposits at the bank were worth £21bn, the gross value of loans and advances outstanding was £33.9bn. The loan to deposit ratio, at 147%, was still well above what the bank would wish to hold in normal circumstances.

The Bank publishes its trading results for each of six retail and commercial divisions. The position of the Ulster Bank is prominent as it is one of the six divisions and also because, of the six, it is the only division which has recently been reporting a loss when allowance is made for impairment charges.

Overall, in the first quarter of 2012, the retail and commercial businesses made an operating profit, after impairments, of £903m. In this, the Ulster Bank recorded a loss of £310m.

For the full financial year, 2011, the operating loss of the Ulster Bank was £1,018m after excluding the impact of impairment on non-core loans of nearly £13bn.

All the large commercial banks operating in Ireland shared the same general fate as a result of the large extension of property lending in the middle of the last decade. With hindsight, did no-one call a halt? Effectively, competition for bank lending became cumulative and ultimately self-defeating.

For the Ulster Bank, the criticism might be that, compared to the rest of RBS, its lending standards proved more vulnerable. No surprise therefore that 'head office' has apparently become critical. Staffing changes for some senior management personnel have taken place.

In defence, the Ulster Bank might argue that, in the Irish market, its performance was, with hindsight, vulnerable but operated in parallel to most of the others. The Ulster Bank would not be at the wrong end of a league table of bank impairments.

Nevertheless, RBS would reasonably expect a robust recovery programme, although recovery programmes when dealing with distressed assets are not a quick fix.

The Ulster Bank is reticent on some aspects of its operations. It is not entirely clear whether the property crisis has hit the Ulster Bank more heavily in the north or the south. The recent quarterly RBS statements did confirm that its property lending in Ireland was proportionately larger in the Republic of Ireland.

Of a portfolio of mortgages on residential property worth £19.8bn, only 11% is in Northern Ireland and 89% is in the Republic of Ireland. The loan to value ratio for residential property was 112%, which implies an overall negative equity on over half of the mortgages. New mortgages are more cautious at 70% loan to value ratio last year.

Commercial property loans outstanding, in Ireland, were worth £14.4bn. The split suggests that, of the Irish lending, 30% is in Northern Ireland and 70% in the Republic of Ireland.

Against the background of worsening impairments, reduced lending and falling customer deposit balances, the Ulster Bank has to cope with serious challenges. RBS may have to be patient to await recovery.