Ulster Bank’s ability to write off future profits against legacy losses reduces

Ulster Bank slashed its expected ability to use losses built up during the financial crisis to minimise its future tax bill, as the lender has lowered its profit outlook and the sector struggles with ultra-low interest rates.

AIB, Bank of Ireland and Permanent TSB, which had almost €4 billion of so-called deferred tax assets as of last June to shield them from corporation tax for decades, are likely to also have faced challenge from auditors over how they account for these assets, which are key to how the banks are valued in the market.

Ulster Bank, which reported last week that its net profit fell 95 per cent to €4 million last year as it took a €80 million tax charge, revealed in the annual report it subsequently filed with the Companies Registration Office that this was due to a reduction in its net deferred tax assets (DTAs) to €184 million from €271 million.

Accounting for DTAs is linked to companies’ long-term profit forecasts and ability to use up such assets to avoid corporation tax.

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Ulster Bank has much lower levels of such assets than AIB and Bank of Ireland, because it is less profitable. Also, unlike the main Irish banks, Ulster Bank and its parent, Royal Bank of Scotland, look at DTAs on a rolling nine-year horizon and move tax losses between balance-sheet assets and unrecognised deferred tax assets, depending on the medium-term profit outlook.

"As there is no time limit on companies' ability to use up DTAs in Ireland, the domestic banks don't use the RBS rolling approach," said Goodbody Stockbrokers analyst Eamonn Hughes. "But with profits coming under pressure for the foreseeable future, it will take longer for banks to use the DTAs, which will reduce the net present value of these assets."

AIB had €2.6 billion of DTAs as of June, while Bank of Ireland had €1.1 billion and Permanent TSB’s stood at €350 million.

Sell-off

A sell-off across Irish banking stocks in the wake of the uncertain outcome of the general election on February 8th has been fuelled in part by concerns over the sector’s DTAs.

While Fianna Fail, which won 38 out of 160 Dáil seats, has said that it would not make changes to the treatment of such assets, Sinn Féin leader Mary Lou McDonald, whose party secured the second-highest number of seats at 37, made noises during the campaign about how banks were paying no corporation tax.

The Oireachtas Public Accounts Committee called in 2018 for a limit to the industry's ability to use DTAs.

With banks’ earnings under pressure from low interest rates and slower-than-expected loan book growth, they are turning their focus increasingly towards cost-cutting. Ulster Bank set aside €26 million for restructuring. It is understood this mainly relates to its move in December to seek 175 redundancies across management grades, even though only about 100 have taken up the offer.

It is expected that the bank will seek further redundancies elsewhere to make up the planned savings. An Ulster Bank spokeswoman declined to comment on the matter.