This week could be a big one for Ulster Bank’s 2,800 employees in the Republic of Ireland, its 1.1 million customers, the Irish banking market and the economy in general.
After months of speculation about the possible outcome of a strategic review of Ulster Bank’s Republic of Ireland operations by its parent NatWest, clarity could come on Friday.
That day NatWest is due to report its annual results for 2020 and the strong expectation is that it will provide an update on its intentions.
How did all this start?
The first sign that Ulster Bank’s future in the Republic of Ireland was in doubt emerged in the Irish Times last September.
The report stated (and NatWest subsequently confirmed) that the group had begun a strategic review of its operations in the south, but not the north.
One of the options on the table, it was claimed, was a complete withdrawal from the market here.
But other choices were also to be probed, including a merger and of course continuing to trade here as normal.
Since then, NatWest has remained pretty tight-lipped, sticking to the line that it continues to review its strategy "appropriately and responsibly" in light of the impact of Covid-19 and the challenges to the economy.
It also has said that if any changes are to be made, they will be undertaken with "full consideration of any impact on customers, colleagues and shareholders in the first instance."
So why is NatWest reviewing Ulster Bank?
Essentially because it thinks it is under-performing.
Royal Bank of Scotland acquired Ulster Bank in 2000 when it bought the then owner NatWest and initially it both fueled and benefited from the Celtic Tiger economy, becoming a significant player in the property development boom of the noughties.
It also expanded, buying First Active in 2003.
But as boom turned to bust, so too did Ulster Bank’s fortunes, and its parent (underpinned by the British government) was subsequently forced to bail the lender out to the tune of £15bn over a number of years from when the banking crisis hit in 2008.
For the following six years, the bank struggled to make headway in the market, weighed down by non-performing loans and the cost of restructuring and downsizing its balance sheet.
In 2014 it finally made a profit again, but even since then the bank hasn’t been able to capitalise fully on the recovering economy.
Ireland is a relatively small banking market and Ulster Bank is only a medium sized player in it.
It has also suffered, like all banks, from the low interest rate environment, weak credit demand at times and the requirements to hold much higher levels of capital than normal due to the legacy of the crash.
At 26%, its reserves ratio is twice what other lenders need, tying up as much as €2bn in capital that could be used elsewhere across the NatWest group.
Throw in the cost of ongoing bailout dividends to its parent (which rebranded as NatWest last year) and the price of dealing with the fallout of its own mistakes on issues like tracker mortgages and poor IT systems, and you quickly begin to see why NatWest decided to run the rule over it again.
Hasn't Ulster Bank reformed itself though?
Yes, to an extent it has.
Pre-pandemic it had reduced the proportion of its loan book that is not performing to under 7%.
It has also taken costs out of its operations, announcing it was planning to reduce its workforce by 266 people last year.
It slimmed down its branch network to 88 through the closure of 22 outlets around the country.
The lender has also made progress in moving to a digital first model, despite high-profile IT hiccups, and has continued to successfully leverage the 20% of the small business market that it holds.
It has also aggressively targeted the mortgage market in the face of increased competition.
Despite all this though, its cost-income ratio remains high at 98.4%, well above that of the wider group’s 66.9%.
And operating profits have remained modest.
"Add in the likely long-lasting impact of the Covid-19 pandemic on households and businesses and it is clear that Ulster Bank continues to face challenges."
So how likely is it that Ulster Bank will wind down its operations in the Republic of Ireland then?
Nobody knows for sure and it is possible that on Friday NatWest will say it is going to keep the status quo.
It did this once before in 2014 when it (RBS then) hired Morgan Stanley to conduct a review, but ultimately decided to stay.
The group could also say on Friday that it has yet to conclude its review process, drawing out the agony further for staff.
But within the industry insiders think the fact that NatWest has left the question remain unanswered for so long now, is not a good sign of its future intentions.
The uncertainty has proven unsettling for staff and customers alike, undoubtedly damaging business, and has also provoked criticism from politicians.
What are the options for an exit?
It could try and sell the whole operation as a going concern to another player.
But this seems unlikely given the problems outlined above with the business.
If NatWest can’t make a go of it, then how would another owner?
So if a decision is taken to exit, then the most likely scenario would be an orderly break up of the bank, with different parts sold to different institutions over a protracted period of several years.
It was reported in October that Cerberus was eyeing the entire €20.5bn loan book, but Ulster Bank said at that stage no talks were taking place.
Such a sale to a so-called "vulture fund" would be politically very controversial, even though borrowers’ terms and conditions would in theory transfer with the loans.
Private equity firm Lone Star was also recently reported by Bloomberg to be lining up for a bid for some or all of the business should it go on the market.
For all its faults, Ulster Bank does have attractive elements, including €22 billion of deposits, the joint third largest mortgage book in the country and a 20% share of the small business lending market.
Although as one banking source put it last week, most would "run a mile" from the deposits given the negative rates environment and the cost of holding cash.
What about a merger with another bank?
There has long been talk of the need for a third pillar in Irish banking to rival the dominance of AIB and Bank of Ireland.
The natural components of this would be a combination of some or all of Ulster Bank, Permanent TSB (PTSB) and KBC Bank Ireland.
But it has never happened and would require a substantial injection of funds as well as political will in Permanent TSB’s case, given it is 75% owned by the Government.
Last month the Irish Times reported that PTSB had retained Morgan Stanley to advise it in relation to Ulster Bank, but only around a potential bid for the SME portfolio, which would be a nice fit for it.
On Thursday, KBC Bank Ireland chief executive, Peter Roebben, told me he didn’t want to speculate, that the bank’s focus was on its day-to-day business, that if something were to happen it would always take stock, but it is not in any formal process whatsoever.
A move by AIB or Bank of Ireland to merge with Ulster Bank seems less likely, but they clearly would be interested in looking at parts of the business, were it up for sale.
FSU is calling on the Minister for Finance to make a statement on the possible PTSB and Ulster Bank loan book sale. A carve up of Ulster Bank is not acceptable and should be avoided at all costs. https://t.co/3dCuO4eVxl pic.twitter.com/3fyig3HmbU— Financial Services Union (@fsuireland) January 29, 2021
How serious would an Ulster Bank exit be?
Given it has been around for 185 years, operating in the Republic since 1860 and is Ireland’s third largest bank, it clearly would be significant.
For staff, there would be the prospect of many or most losing their jobs over time, in a market where all the other Irish banks are also reducing their workforces, something the Financial Services Union is very concerned about.
Customers would likely see their loans sold to other lenders or funds and would have to move their current accounts to alternative banks.
They would also have to find a new home for their deposits, although a deal could be done by Ulster Bank with another bank on that front.
And branches in many small towns around Ireland would surely close.
In terms of the wider banking landscape, the market would lose another player at a time when it needs more competition, not less.
Since the financial crash lenders including Anglo Irish, Irish Nationwide, Bank of Scotland Ireland, Nationwide UK, Danske and Rabobank have all exited the retail market for various reasons.
The Central Bank has said the effects would be felt most in SME lending.
While on Tuesday Minister for Finance Paschal Donohoe said the consequences would be "very serious" for the economy, employment and credit.
Points he said he has made directly to NatWest and to the British Government which owns 62% of NatWest.
Friday may reveal whether either took heed, or ultimately whether it will come down to a simple equation of business being business.