Goldman Sachs advises NatWest on Ulster Bank review

NatWest is being advised by Goldman Sachs on the future of Ulster Bank in the Republic as the UK lender looks at winding down the unit which shows no signs of making enough money to cover its own funding costs.

Sources said London-based investment bankers at the US banking group have been working with NatWest on its strategic review for some months.

A spokeswoman for NatWest and a spokesman for Goldman Sachs declined to comment.

The Irish Times reported in September that NatWest, formerly known as Royal Bank of Scotland (RBS), is actively considering winding down Ulster Bank in the Republic, which holds about a 15 per cent share of the State's mortgage market and is responsible for around 20 per cent of small business lending.

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It comes as the Covid-19 pandemic has added to challenges facing the bank, dogged for years by high costs and low profitability in an era of ultra-low central bank interest rates and muted loan growth.

Running costs at Ulster Bank, led by chief executive Jane Howard, were between 95 per cent and 111 per cent of its income over the past three years – about double what banks typically target. The wider NatWest group's cost-income ratio stood at 65 per cent in 2019.

The Irish unit’s profitability has also stood out as a weak feature, with its net income amounting to 2.3 per cent of the equity that NatWest had invested in the business at the end of last year. Banks typically target a return on equity of 8-10 per cent.

Even after managing to convince the Central Bank of Ireland to allow Ulster Bank to return €3.5 billion of surplus capital to NatWest over the past four years – the equivalent of about a fifth of its parental bailout bill during the financial crisis – it is still being made to retain one of the highest capital bases in Europe.

The unit's equity capital ratio currently stands at about 28 per cent, NatWest's chief executive Alison Rose noted last month as the group reported quarterly results. That is double the wider group's medium-term capital reserves ratio target.

Ms Rose declined at the time to give a timeline for a decision on Ulster Bank, which announced a week before news of the scope of the strategic review emerged that it was cutting 266 of its 2,800 jobs to rein in costs.

The Sunday Business Post reported over the weekend details of a meeting that took place between senior Ulster Bank figures and the Minister for Finance, Paschal Donohoe, on October 21st.

Challenges

A record of the meeting, released under freedom of information laws, said Ulster Bank’s chairman of just one month at the time, Ruairí O’Flynn, told the Minister that a review was being undertaken as “the current business model for the bank presented challenges” for it.

“A number of options are being considered at this time,” he said, according to the report.

Mr O'Flynn subsequently quit the role the week before last, citing "personal reasons". An email sent to staff said at the time that his decision had nothing to do with the strategic review.

It is understood Mr O’Flynn, a former chief executive of Canada Life Ireland, was well aware of the scope of the review before taking on the position. He succeeded Des O’Shea, who had been chairman for four years.

RBS inherited Ulster Bank in 2000 through its takeover of National Westminster. It doubled down three years later in the Republic through the purchase of First Active.

Ulster Bank received a bailout from RBS of £15.3 billion (€17bn) after the 2008 crash, about a third of the money UK taxpayers pumped into the entire group.