The announcement that Ulster Bank’s operations in the Republic of Ireland are to be ‘restructured’ has sent shockwaves across the entire banking sector, adding to concerns that owner, Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS), may have plans to put the third biggest bank in Ireland (after Bank of Ireland (ADR) (NYSE:IRE) and AIB) out of business.

Is It The End Of The Road For Ulster Bank?

Ulster Bank: Yet another ‘bad’ bank

Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS) has announced that much of the bank’s Irish business will be put into an €38 billion, internally-managed ‘bad’ bank, while the management team focuses on finding ‘a viable and sustainable business model’ for the future. However, a spokesperson for the bank stopped short of saying that it was withdrawing from the republic, saying:

‘Ulster’s cost base will need substantial restructuring if the bank is to remain attractive.’

In the statement, management added that the bank was part of its core business and important to its operations in Ireland, but that wasn’t enough to allay the fears of customers and consumer groups who fear that if the banking sector contracts any further, it will mean less competition and higher banking fees.

The news comes close on the heels of announcements from Danske Bank A/S (ADR) (OTCMKTS:DNSKY) (CPH:DANSKE) and ACCBank, both of which are closing down their operations in Ireland.

Another victim of the Celtic Tiger

Ulster Bank revealed earlier that it had lost £707 million in the first nine months of the year as a result of impacts from the property crash, leading to operating losses of £461 million and a return on equity of –13.2% for Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS). Since the start of the financial crisis, Ulster Bank has drained no less than £15 billion of additional capital from its parent and the transfer of £9 billion in loans to the ‘bad’ bank certainly won’t look good on the balance sheet. These are seriously unsettling figures for RBS management and shareholders alike.

Chief Executive of Ulster Bank, Ross McEwan said:

‘We need to ensure that we have a viable and sustainable business model for Ulster Bank as part of this review. It’s an important business for the whole island of Ireland and we understand the need to get this right.’

Eamon Hughes, an analyst at Goodbody Stockbrokrs, said it would have been ‘illogical’ for Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS) to make any other decision, given the state of the banking sector at present:

‘Bank of Ireland expects to return to profitability this quarter, while AIB could follow sometime next year.’

The Irish government responded positively. Minister of State for the Department of Finance said:

‘Obviously we need to see a competitive banking sector because the only way back for this country is to have a competitive banking sector. It was inevitable however that as a result of the crash and the recapitalisation of the banks and the deleveraging that followed, that there would be this type of scaleback within the banking sector.’

What’s good news for the banks, could be bad for customers

The worry is that this could be a lot more than a ‘scaleback’. The UK government owns 81% of Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS) and recently stopped short of ordering a break up of the bank, and is still looking for its money back from when it stepped in to rescue the institution. The review is likely to continue until early next year, but if RBS comes under any further pressure, then the ‘restructuring’ may only be a temporary stay of execution.

The departure of Ulster Bank will be good news for the new duopoly of AIB and Bank of Ireland, unless, of course, Permanent TSB can entice customers from the departing banks to come to them. As Hughes says:

‘Less competition will be good for the banks that remain and they will price credit accordingly.’

Which, for customers, sounds very ominous indeed.