Ulster Bank makes ‘eye-catching’ €278m provision for likely loan losses

Ulster Bank plunged into a deep loss in the first half of the year in the Republic as it set aside a higher-than-expected €278 million to cover likely loan losses resulting from the coronavirus economic shock, putting pressure on other banks in the Republic as they report figures next week.

Goodbody Stockbrokers analyst Eamonn Hughes described the impairment provision as “eye-catching”, equating to an annualised figure of 2.48 per cent of the bank’s loan book. That is 45 per cent higher than his estimate for the State’s three domestic banks, which was already at the more pessimistic end of analysts’ expectations.

“There will clearly be some front-loading from Ulster in this number,” said Mr Hughes. “But certainly this impairment print may make investors a bit more nervous heading into next week.”

Mr Hughes expects AIB, Bank of Ireland and Permanent TSB to report a combined €1.37 billion of loans charges for the first half, rising to €2.69 billion for the full year.

Still, Ulster Bank chief financial officer Paul Stanley told The Irish Times that he expects the bank’s impairment provisioning to decline in the second half, assuming there isn’t a second wave of coronavirus and the economy continues to recover.

The first-half provision, as well as a decline in lending activity, resulted in the bank, a unit of UK-based NatWest, formerly Royal Bank of Scotland, reporting on Friday that it posted a €276 million operating loss for the period, compared to a €26 million profit for the first half of last year.

The scale of the provisions was up significantly from an initial €32 million set aside for the first quarter as banks began to assess the initial potential damage from the virus on their mortgage and commercial loan books.

Payment breaks

Ulster Bank extended payment breaks on about 12,000 mortgages, 1,300 personal loans and 3,500 business facilities in recent months.

Chief executive Jane Howard the bank is currently seeing about 60 per cent of home borrowers coming off an initial three-month relief period availing of the opportunity to extend this out to a maximum six months. She said it is not yet clear what percentage of loans will ultimately need to be restructured.

The bank has also seen a “sharp decline in demand for new lending”, fuelling a €700 million annual contraction in the size of its net loan book, to €20.5 billion, at the end of June.

Operating expenses fell, reflecting a 9.7 per cent reduction in headcount, including about 100 managerial positions, and reduced project costs compared to the first half of last year. While Ms Howard said that the bank “paused” planned job cuts its 400-strong problem loans unit as a result of recent economic shock, job cuts across the business are “inevitable”. She declined to comment on potential numbers or timing.

“With pressure on our income, costs remain a challenge for our business, made even more acute when the impact of Covid-19 is overlaid. Our economy, our customers and our business have been and will continue to be impacted by the pandemic,” Ms Howard said.

“As we respond, we are taking into account a fundamental reshape of the environment and how we provide what our customers want. Our customers have increasingly turned to digital as part of the pandemic restrictions and our activity has accelerated in response.”