AIB will secure the last assets of Ulster Bank with a tracker mortgage deal

AIB has confirmed it is currently in exclusive talks with NatWest to buy a €6bn portfolio of tracker mortgages from Ulster Bank as part of the UK bank’s exit plan.

The potential deal, which has long been rumored to be in the works, would involve the transfer of Ulster Bank’s last remaining assets when the bank exits the Irish market later this year.

It would mean thousands of customer accounts moving from one bank to another, but the terms and conditions – most notably the competitive pricing – would remain the same.

However, tracker customers will pay higher prices once the European Central Bank (ECB) starts raising interest rates.

Analysts welcomed the development, saying it would improve AIB’s net interest income and make better use of the bank’s excess liquidity and capital.

AIB is highly capitalized and has a large excess of customer deposits due to a significant increase in savings during the pandemic. Its ability to organically increase lending is constrained in part by the limited supply of new housing and central bank mortgage regulations, which effectively limit its home loans.

Buying Ulster Bank’s Book of Trackers, which has an average yield of 1 per cent over the ECB’s refinancing rate, represents an attractive alternative to AIB as it seeks to capitalize on upcoming rate hikes and a less competitive Irish banking landscape.

“While we await key details on the Tracker portfolio (prices and earnings), a transaction brings AIB to higher earnings – leveraging short-term excess capital and liquidity – and should be attractive based on earnings growth,” wrote Davy analyst Diarmaid Sheridan in a Note to Customers.

The news follows Thursday’s approval by the Competition and Consumer Protection Commission (CCPC) of AIB’s €4.2 billion acquisition of Ulster Bank’s corporate and commercial loans, despite acknowledging that the transaction would reduce competition in commercial banking would.

Colin Hunt, CEO of AIB, said the approval is “another important milestone in AIB’s inorganic strategy and follows last year’s successful integration of Goodbody.”

However, the regulator’s grudging approval was met with some objection, with the CCPC in its own resolute acknowledgment that international studies have shown that less banking competition leads to “worse outcomes for commercial borrowers in terms of pricing, innovation and service”.

“This is backed up by some of the corporate clients contacted by the CCPC who said they had concerns about Ulster Bank’s exit from the state,” she added.

Goodbody analyst John Cronin said, “The CCPC’s strong reservations are being noted by other parties seeking competitive clearance for domestic acquisitions.”