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Saturday 21 October 2017

Ulster Bank move could be bad news for Irish customers

The sale of a majority stake in Ulster Bank to a bunch of US venture capitalists is likely to reduce competition in the Irish banking market even further.

While Ulster Bank parent, UK bank RBS, hasn't officially confirmed the sale of its troubled Irish subsidiary yet, the omens aren't good.

Over the past week there have been a series of apparently well-sourced "leaks" in the media stating that a sale of Ulster Bank to a group of US venture capitalists was imminent.

It's a familiar tactic. By using unnamed sources, RBS preserves its deniability in case the deal comes unstuck at the last minute, while allowing it to gauge possible reaction to an Ulster Bank sale.

It's not difficult to see why RBS wants to be shot of Ulster Bank. Since RBS had to be rescued by the British government in 2008, one-third of the £45bn of UK taxpayers' money that has been pumped into the bank has gone to plug the holes in Ulster Bank's balance sheet caused by huge Celtic Tiger-era loan losses.

A further incentive for it to get rid of Ulster Bank is that the British government was left with an 82pc stake in RBS following the 2008 bailout.

UK Chancellor of the Exchequer, George Osborne, is desperate to sell off at least some of this shareholding in advance of the British general election, which is due to take place by May 2015.

Any sale of a significant chunk of the British government's RBS shareholding will be difficult, going on impossible, with Ulster Bank still on the books.

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Further increasing speculation that an Ulster Bank sale is very close is the fact that ratings agency Fitch has begun to rate Ulster Bank in the Republic of Ireland separately from UIster Bank in Northern Ireland.

It's no secret in banking circles that RBS has also been integrating Ulster Bank in Northern Ireland much more closely into its UK operations.

But surely the future ownership of Ulster Bank is purely a technical issue of interest only to financial anoraks such as yours truly?

If only it were.

Ulster Bank is the third-largest bank operating in the Republic of Ireland.

Hundreds of thousands of individuals and businesses rely on Ulster Bank for their mortgages, overdrafts, personal and business loans.

If, as now seems very likely, Ulster Bank is sold, it is these people and businesses who will be the first to feel the impact.

But unlike Bank of Scotland Ireland/Halifax which exited the Irish banking market in 2010, Ulster Bank isn't getting out of Ireland.

While the bank is being sold, Ulster Bank will remain, albeit with new owners.

All that will have happened is that one set of foreign owners of Ulster Bank will be replaced by another.

If RBS was to sell Ulster Bank to another foreign bank that would be a perfectly valid argument. But it's not.

While we will have to wait until the official announcement, which could come as soon as this week, to find out for sure who the buyer is, the smart money is on American venture capital firms KKR and Apollo Capital.

If Ulster Bank is sold to venture capitalists the new owners will seek to squeeze every last possible cent they can out of their purchase.

This won't be about growing the loan book but about maximising short-term profits so that the new owners can "flip", i.e. sell Ulster Bank on again in a few years time.

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With their eyes fixed on a huge capital gain in a couple of years time, Ulster Bank's new owners won't be interested in competing vigorously with AIB and Bank of Ireland. Far from it.

Like the 'Big Two', Ulster Bank's owners will focus instead on higher interest rates for borrowers, lower interest rates for savers and higher charges all round.

With competition having virtually disappeared from the Irish banking market, the last thing the economy needs is for one of the largest banks to fall into the hands of a bunch of venture capitalists interested only in boosting short-term profits.

If this is allowed to happen then an already bad situation for Irish bank customers is going to get an awful lot worse.

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