Toxic loans at Ulster Bank make up nearly a quarter of the £38 billion of bad debts being hived off into the new internal “bad” bank at RBS.
Ulster has long been a thorn in RBS’s side after the division was left with mammoth losses and crippling bad debts in the wake of the financial crisis.
Chief executive Ross McEwan said on Friday that the remaining part of Ulster will be included in a group-wide review - the results of which are due in February - as RBS attempts to find a “viable and sustainable business model” for Ulster.
However he added that Ulster Bank was “an important business for the whole island of Ireland and we understand the need to get this right”.
It is the largest bank in Northern Ireland and the third largest in the republic, with more than 1.9 million customers.
Acquired when RBS bought NatWest in 2000, the group has faced mounting calls to hive off Ulster Bank as its woes have added to the wider problems at the part-nationalised lender.
RBS and the Government have had to tread carefully, given its importance as a lender to the whole island of Ireland and the fact it is the last British-owned retail bank in Northern Ireland.
The Treasury’s report into RBS said “while Ulster Bank fits well with RBS’s strategic footprint and core capabilities, a sustainable operating model needs to be found for it so that it is a viable business in a normalising Irish economy”.
It said there was “considerable connectivity” between Ulster Bank and the rest of RBS, and said as Northern Ireland’s largest bank, it was “important to the health of the UK economy”.
The report added: “UK businesses benefit from a bank which is active in both the UK and Ireland, which remains one of the UK’s largest export markets.”
There will no doubt be fears the review will lead to further restructuring at Ulster, which is already slashing its branch network from 214 to between 175 and 185 by the end of 2014 and cutting its workforce from around 5,800 full-time staff to between 4,000 and 4,500 by 2016.
Ulster was quick to reassure it was “business as usual” following the RBS announcements and that the review would create a “really good bank for our customers”.
An Ulster spokesman said: “We will now work through the detail of how we will operate the ‘bad bank’ and the structure required to support this.
“In the meantime, it is business as usual for our customers and we will communicate directly to any impacted customers.”
Third quarter figures showed an improving picture at Ulster, although the Treasury revealed the importance of its recommendation to offload £9 billion of bad debts to the RBS bad bank and the need for a review.
Despite a near halving of operating losses at Ulster to £132 million, the Treasury said in its report that analysts did not expect Ulster’s core business to break even until 2015 at the earliest.
Bad debts dropped 38% to £204 million year-on-year in the three months to September, but losses in Ulster’s commercial real estate portfolio sent impairments in the non-core division of the wider RBS group sharply higher.
Ulster was hit hard by the financial crisis and the bursting of Ireland’s property bubble, which left it with hefty arrears and losses on loans turned sour.
The bank has also suffered a series of recent reputational blows, with a serious IT glitch last summer causing particular embarrassment after customers were left unable to access their accounts for several weeks.
NatWest and RBS were impacted by the same IT troubles, but their issues were resolved within around 10 days, leaving RBS to fend off accusations from the then shadow secretary of state for Northern Ireland Vernon Coaker that it had put customers in Ireland to the “back of the queue”.
Ulster was then fined a record 1.96 million euros (£1.7 million) by the Central Bank of Ireland at the end of last year for breaching rules on how much capital and liquidity it must maintain to ensure the lender and its customers are protected in a crisis.
Concerns over Ulster Bank have led MPs on the Northern Ireland Affairs Committee to begin investigating wider lending practices and the future of the bank, with fears over a lack of bank credit in the region.