NatWest’s struggle to sell Ulster Bank

COMMERCIAL BANKING It was once said to comply with the 3-6-3 Rule. This means paying the depositor a 3% interest rate, charging the borrower 6%, and always being on the golf course by 3pm. The world is a long time ago. With interest rates bottoming out today, the spread between deposit and lending rates has narrowed. Bankers are more likely to get stuck behind their desks trying to figure out new ways to make a profit, rather than teeing off at 3 pm. In the era of ultra-low interest rates, traditional business models are far less attractive to investors, as NatWest, a major British bank, discovered when it tried to sell its subsidiary Ulster Bank’s Irish business. Looks like.

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The NatWest Group has been offloading its Irish business for six months following a strategic review. I was interested in a loan book from a private equity firm, but no one wants to undertake a branch network and deposits. In February, NatWest closed its branch office and announced that Ulster Bank’s Irish operations would end in the next few years. As the private-equity boss said, “I used to buy the deposit business because it was a cheap source of funding, but today I’m raising cheaper money from the market without the hassle of running a bank branch. I can do it”.

Banking was technically known as changing maturity: short-term borrowing and long-term lending. A typical example is a bank that borrows in the form of a small deposit from a saver that is repaid on demand and lends it in the form of a 25-year mortgage. However, that model relies on an appropriate spread between short-term and long-term borrowing costs, the net interest margin. The 13-year low interest rates pushed UK bank margins from more than 3% in 2007 to nearly 2% by 2019, effectively reducing the profitability of banks’ core businesses by a third. Over the past year, banks have been flooded with deposits from households and businesses, but lending opportunities have been depleted, putting further pressure on their profits.

The stock prices of British banks reflect their gloomy outlook. Prior to 2008, investors typically valued at about twice their net worth. In the next decade, it was less than the value of their assets. In other words, investors believed that banks were often less valuable than the sum of their parts. By 2020, this ratio had dropped to 0.4.

Banks are trying to create new sources of profit as their core businesses are sluggish and likely to stay there. Another major bank, Lloyds, is considering expanding into the real estate business and rents homes directly to tenants. All banks are discussing the potential to cross-sell other, more profitable financial products to their customer base, such as insurance, asset planning and wealth management. Such experiments in a fee-earning business model do not always work for UK lenders. Big gold spinners since the early 2000s have added product protection insurance to their loans, causing scandals and since then have brought about £ 40 billion in compensation payments to the sector.

Instead of selling new things to the British, you’re charging more for the services they’re used to getting for free. The law enacted in 2015 guarantees access to free bank accounts, but such accounts do not have to have all the current features. One banker said, “If deposits are funding profitable activities elsewhere, providing people with a deposit account for free is one thing, otherwise it is another. We don’t run a charity. ”If a bank starts billing for services such as ordering new debit cards, paying remittances, or using automated cash deposit machines, it frustrates or loses customers. I’m afraid that I’ll start billing gradually. But they have to find some way to pay the golf club membership fee. ■■

This article was published in the UK section of the print version under the heading “Par for the course”.

NatWest’s struggle to sell Ulster Bank

Source link NatWest’s struggle to sell Ulster Bank

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