Royal Bank of Scotland Group Plc is plotting a retreat from Ireland after spending 15.3 billion pounds ($26 billion) over the past six years bailing out its operations in the country.
The British bank is looking for investors to buy a stake in Ulster Bank Ltd.'s operations in the Republic or for another bank to merge with the division, allowing RBS to dilute its holding, after racking up 17 billion pounds of losses from bad loans in the worst real-estate crash in western Europe.
RBS Chief Executive Officer Ross McEwan is under pressure to return some of the 45.5 billion pounds British taxpayers injected into the Edinburgh-based lender during the financial crisis of 2008 in the biggest banking bailout in the world. Ireland’s economy is rebounding from the worst recession on record, helping him to attract buyers for the first time since the financial crisis.
“The timing may reflect a political rather than a commercial agenda,” said Stephen Lyons, an analyst at Dublin-based Davy, Ireland’s largest securities firm. “It seems odd that they’re looking for outside investment now, when Ulster is at the point of returning to profit. Selling a stake in the near term wouldn’t capture the business’s proper value.”
Ulster, Bank of Ireland Plc, the nation’s largest lender, and Allied Irish Banks (ALBK) all returned to profit in the first quarter for the first time since the onset of the financial crisis. The National Asset Management Agency, set up to rid Irish lenders of toxic property loans, expects to make a profit of 1 billion euros ($1.36 billion) over its lifetime, according to a person with knowledge of the matter, amid a surge in demand for real estate assets in the country.
RBS is yet to return a penny of its bailout to British taxpayers. The government has cut its stake in Lloyds Banking Group Plc (LLOY) to 25 percent and is preparing to offer a further chunk to individual investors later this year. RBS stock trades at about 345 pence, below the 407 pence price at which the government would break even on its investment. The Conservative-led coalition faces a general election in 2015.
“The U.K. government is looking down the barrel of a general election,” said Ray Kinsella, banking professor at University College, Dublin. “There’s little doubt that the U.K. is putting pressure on RBS to accelerate restructuring, including increasing lending to the domestic economy, and to reduce its direct exposure to a problematic presence in the Republic.”
McEwan and Jim Brown, who leads Ulster Bank, declined to be interviewed for this article through Linda Harper, a spokeswoman for the bank in London.
RBS has hired Morgan Stanley to review its Ulster unit. McEwan pledged on Feb. 27 he will retain RBS’s operations in the North, which is still part of the U.K. The lender is still open to ceding control of Ulster in the Republic of Ireland, according to a person with knowledge of matter.
RBS has approached private-equity firms about making an investment in the business in the south, said two people, who asked not to be identified because the talks are private.
Executives are also considering whether to merge the operation in the Republic with another lender, reducing RBS’s holding in the operation, the people said. A larger unit would be more attractive for potential buyers, one of the people said.
McEwan told analysts on a May 2 call RBS is trying to turn Ulster into a “challenger” to Ireland’s two largest lenders. The lender is “just too small to be that,” he added.
After moving risky real-estate loans to RBS’s internal bad bank, Ulster has about 29 billion euros of loans, compared with 83 billion euros at Bank of Ireland (BKIR) and 65 billion euros at Allied Irish.
“Having a minority stake in a larger entity would probably prove easier to divest over time than to attempt to sell a smaller bank in its entirety,” Philip O’Sullivan, an economist at Investec Plc (INVP) in Dublin, said.
Officials at Morgan Stanley declined to comment on the negotiations.
RBS executives have approached officials at the finance ministry to discuss the possibility of merging Ulster with part of Permanent TSB Group Holdings Plc (IPM), the bailed-out mortgage lender, two people familiar with the matter said. KBC Groep NV’s Irish unit may be another possible merger candidate.
“We’re quite interested in how the landscape will evolve over time,” said Wim Verbraeken, CEO of KBC Bank Ireland. The bank’s strategists “wouldn’t be doing their job if they weren’t studying various options,” he said.
Speaking to reporters, Jeremy Masding, CEO of Permanent TSB, said that while he hasn’t spoken with Ulster Bank, the lender would be “open minded” if another firm were to approach them.
Permanent TSB has about 23 billion euros of Irish loans, mostly mortgages, while KBC has about 12 billion euros.
“A merger would give the new entity critical mass and external investment would help, when RBS are reluctant to commit any further capital to the Republic,” said Kinsella.
RBS bought Ulster in 2000 as part of its acquisition of National Westminster Bank Plc. Ireland was in the midst of the biggest economic boom in western Europe. Under the ultimate control of then RBS CEO Fred Goodwin, Ulster bankrolled some of the nation’s biggest real-estate developers, more than doubling assets to 70 billion pounds in the four years before boom turned to bust in 2008.
Ulster became the first to offer loans for 100 percent of the value of homes in 2005, and followed HBOS Plc in offering loans tied to the European Central Bank’s benchmark rate. Ireland’s banks have lost money on those tracker mortgages because their own costs of funding the loans surpassed borrowers’ repayments, which are linked to ECB rates. The ECB has cut its rates from 4.5 percent in 2008 to 0.25 percent.
“Both products were like pouring a can of petrol on a naked flame,” said David Went, 67, Ulster’s CEO from 1988 to 1994. “We all made a great mistake matching them,” said Went, who retired as CEO of Irish Life & Permanent Plc in 2007, four years before the state need to save the bank.
Ulster Bank has lost 17 billion pounds on soured loans in the past six years, according to company filings. By the time of the crash in 2008, Ulster controlled about 17 percent of mortgage market. The equivalent of a third of RBS’s bailout, funded by British taxpayers, was spent rescuing the Irish unit.
“U.K. taxpayers must be really annoyed about the fact that RBS keeps having to pump money into Ireland,” said Karl Deeter, founder and now compliance manager at Dublin-based Irish Mortgage Brokers. “But a lot of Ireland’s problems were imported problems.”
Since the crash, Ulster has cut about 1,350 jobs out of 6,750, closed offices around the country and moved 15 billion pounds of loans to an internal bad bank. This month, Ulster said it returned to operating profit in the first quarter for the first time in five years as loan losses fell 80 percent, amid early signs of a recovery in Ireland.
Home prices in Dublin, the Irish capital, surged 18 percent in the year through April. International investors from Donald Trump to Blackstone Group LP (BX:US) are snapping up everything from golf courses to apartment blocks in Ireland after it completed its bailout program in December.
Buyers spent about 939 million euros on Irish commercial real estate in the first quarter, almost as much as they paid during the four years through 2012 combined, according to CBRE Group Inc. (CBG:US)
Ireland’s economy, which shrank about 15 percent during the crash, will grow 1.9 percent this year and 2.2 percent this year, outpacing the euro-region average, the Organization for Economic Cooperation and Development said.
Ulster is only one part of a bank McEwan is trying to simplify. He’s preparing an initial public offering of its U.S. unit, Citizens Financial Group Inc., and is shrinking RBS’s investment banking operations. In February, RBS agreed to sell its equity derivatives and structured products unit to BNP Paribas SA. (BNP)
Speaking on a call with analysts on Feb. 27, McEwan described RBS’s turnaround as a five-year process. The lender will try to focus on the U.K, reduce its exposure to wholesale banking and lower its risk profile, he said.
“It’s clear that RBS has no strategic interest in Ulster Bank or the Republic of Ireland,” said Went. “I’m still staggered by the extent that Ulster Bank departed so quickly from its conservative roots and got out of control. I’m heartsick.”
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