AIB is in talks to acquire Ulster Bank’s € 6.5 billion low-profit loan portfolio in the Republic, sources say.
The move comes a month after AIB agreed to buy € 4.1 billion in corporate and business loans from Ulster Bank, as the latter prepares to withdraw from the market.
Sources say AIB should buy the book at a discounted price to reflect the fact that tracker loans generate low returns, based on the European Central Bank’s policy rate, which is at an all-time high of zero percent since March 2016.
Ulster Bank’s tracker loans currently earn a net interest margin – the difference between the average rates at which the bank finances and lends to customers – of 0.75%, compared to around 2% for its non-tracker home loans, according to to estimates by analyst Davy Diarmaid Sheridan, contained in a report written in March.
AIB’s talks to acquire Ulster Bank tracker loans may also reflect the idea that ECB rates will rise over the medium term.
Still, the ECB on Thursday decided to push expectations of a rate hike into the future, as it signaled it would let inflation soar to ensure it hits its 2% target. This inflation target is unlikely to be reached for at least two years, according to the ECB’s own estimates, and economists now predict it could be 2024 or 2025 before rates rise.
Irish banks withdrew their tracker loan offers in 2008, as their own funding costs skyrocketed and no longer matched official central bank interest rates. In recent years, they have had to set aside a total of more than 1.5 billion euros to cover reimbursements, compensation, administrative costs and provisions for regulatory fines, after the industry wrongly refused to thousands of customers qualify for tracker loans – or place borrowers on the bad margin above the ECB rate.
AIB had around 7.4 billion euros in tracker loans on its books at the end of December, representing a quarter of its Irish residential mortgage portfolio.
A deal with Ulster Bank would mark the first time an Irish bank has aimed at expanding its tracker portfolio since the onset of the financial crisis. An Ulster Bank spokesperson and an AIB spokesperson declined to comment.
AIB’s interest in tracker loans emerged on Friday, hours after small rival Permanent TSB (PTSB) confirmed plans to acquire € 7.6 billion in standard mortgages and small business loans as well as 25 branches of Ulster Bank.
The PTSB and Ulster Bank owner NatWest Group said they have signed a memorandum of understanding in the form of a proposed deal, which would also see the transfer of 400 to 500 Ulster Bank employees.
The proposal would also see NatWest take a 20 percent stake in PTSB in partial payment.
Analysts say Ulster Bank will still be left with around 1.5 billion euros in problem loans, mostly mortgages, after expected sales of its healthy loans. The bank will also likely look to sell them to a struggling debt fund in the coming years to complete offloading its loan portfolios.