I thank the Chairman and members of the committee for this opportunity to discuss matters relating to Ulster Bank. I am the chief financial officer and interim chief executive officer of Ulster Bank Ireland DAC. I am joined by my colleagues Eddie Cullen, managing director of commercial banking, and Ciarán Coyle, managing director of retail banking. Mr. Coyle has just moved into that role in the last few weeks. He was previously chief administration officer of the bank. In my opening statement today I would like to update the committee on some of the developments in our business since we met last. I know that some of these are areas the committee specifically wanted to cover today.
Our focus remains on ensuring that Ulster Bank is best positioned to compete and grow for the benefit of our customers, economy and shareholders while seeking to regain customer trust by addressing mistakes of the past. At our full year results in February we showed progress across a number of key areas. We had an adjusted operating profit of €109 million. There was an operating loss of €151 million, which reflected conduct and loan sale provisions we took at year end. We continue to reduce our cost base and to increase our lending to customers and we have reduced our risk-weighted assets. We paid a €1.5 billion dividend to our parent and made improvements to our net interest margin, reflecting our work to build a safer, more efficient and sustainable bank. We continue to innovate in digital banking, with Apple Pay and Android Pay and our market-leading mobile banking app. We have also been working hard to resolve the mistakes of the past. We recognise that full and timely resolution of these issues is essential for customers and in building trust in Ulster Bank.
I will briefly cover our non-performing loan strategy. Consistent with the industry-wide regulatory requirement to reduce non-performing loans, we included an impairment provision in our 2017 results to allow for potential sales of loan portfolios that are in long-term arrears. This difficult decision comes a decade after the financial crisis began and the continued extension of forbearance cannot be maintained. Not all mortgages are sustainable and we are obliged to reduce the level of non-performing loans on our balance sheet.
For mortgages that are not sustainable, additional forbearance will not bring them back to a performing position. The portfolio for sale that we have announced comprises Republic of Ireland mortgages, split into approximately 45% buy-to-lets, BTL, and 55% personal dwelling house, PDHs, by value. The face value of the loans is currently €1.6 billion, but that will continue to change as we move towards completion of a sale, and engage with customers as part of that process as well.
Table 1.1 breaks down the loan portfolio. There are 3,600 PDHs and 2,900 BTL accounts in that, worth €900 million and €700 million, respectively. The average arrears of customers in PDHs is €52,000, while for BTL customers the average is €31,000. The average missed payments in the PDH category is 43 and, for BTL, it is 15. The average number of forbearance arrangements that a customer has been in is three for PDHs and three for BTLs. The average number of months spent in arrears is 44 for PDHs and 45 for BTLs.
In the PDH category, some 73% first went into arrears between seven and nine years ago, and all are currently in arrears. In the BTL category, 75% have been in arrears for more than 12 months during their lifetime. It is worth noting that the Deputy Governor of the Central Bank made the following comments recently on loan sales:
[On the impact of non-performing loans on the economy] the continued high level of non-performing loans makes banks highly vulnerable to future economic downturns, from both the existing non-performing loans, and potentially new defaults. While all the Irish retail banks are significantly better capitalised than pre-2008, they are more vulnerable than those without this legacy to future economic shocks.”
In this context, the Central Bank also noted: "Portfolio sales are a legitimate and necessary approach for banks to use to address non-performing mortgage loans."
I will briefly cover the tracker mortgage examination, as we will go into more detail later. Of the 3,490 customers identified in our phase 2 report, we remediated 2,500 by the end of quarter one 2018, in line with our commitments. We will meet the deadline for remediation for the vast majority of the remaining customers in this group by the end of June, with a small number completed in July as they require manual calculations and, therefore, additional levels of assurance. There will be an exception for approximately 100 additional customers whom we have as yet unable to locate, despite our best efforts. Every effort is being made in that respect.
Following a further file review, we confirmed in April 2018 that up to 2,000 additional customers are impacted by the examination. The exact number is subject to completion of the bank's internal file review process and assurance by the external, independent third party, KPMG. The majority of these customers retained their tracker mortgage but because of various different administration errors were on wrong rates. The remediation payments will be of a significantly smaller magnitude than for those customers who should have been on a tracker rate but were on another product types. We are currently working to correct the rates of these newly identified customers, and this will be complete by the end of quarter three 2018. We expect to substantially progress the redress and compensation payments to these customers by the end of quarter three, with all of these customers to be completed in quarter four.
While we are working to conclude the remediation phase of the examination by year end, the appeals process will be available to customers beyond that point and for 12 months following receipt of remediation. We fully acknowledge the time it has taken to put this right for customers and apologise unreservedly for it.
On business lending interest rates, we have been conducting a review of business practices, processes and customer journeys with a view to ensuring that any legacy issues are put right for customers. As part of that review we have identified inconsistencies in documentation relating to 18,000 commercial loan accounts. In summary, in March 2012, the bank advised customers via letter and in the national media that it was changing its definition of "cost of funds", a variable component of the interest rate charged on their accounts. At the time we believed the documentation applied to every account and that it allowed for this change. However, in conducting our review, we have since identified that the facility documentation of these 18,000 customer accounts potentially did not allow for this change in definition and they were, therefore, overcharged. The overcharge is less than 0.3% per annum over the lifetime of the overcharge, and the average refund due is less than €2,000. However, the amount of overcharge will vary depending on the time a loan has been outstanding, and the amount of the loan itself.
The calculation of the overcharged interest is a complex exercise, but we expect to complete remediation for the majority of customers by the end of 2018, with the most complex cases completed by quarter one 2019. Customers are not required to take any action; we will write to all impacted customers and provide remediation in due course. Should customers have any queries, we have a dedicated customer helpline and team in place to respond to queries from customers which is available on our website.
With regards to GRG, we have provided the committee with detail on this issue previously. I would like to emphasise that there are a number of avenues open to customers who believe that they were treated unfairly in any way. This involves the normal complaints process of the bank and a separate independent process. We would encourage any customers with concerns about their treatment in GRG during the relevant period, including any matters relating to Republic of Ireland banking regulations at the time, to get in touch with our helpdesk, details of which can be found on our website. Following a review of customer files to establish whether they were charged complex fees - an issue which has occurred within GRG - Ulster Bank identified 17 customers eligible for a refund of the complex fees they paid to us. We have also received 63 complaints and these are being assessed through our complaints process.
On the recent customer transaction issue, on 24 April customers reported that debit and credit transactions with a date of Monday 23 April were no longer showing on their accounts. These transactions had previously been visible from 6 p.m. on 20 April onwards. We will speak about this in more detail during the rest of the session, but to clarify, this issue occurred as a result of human error and was not related to an IT systems failure. The affected accounts were unfortunately impacted for 24 hours. While working to resolve the matter as quickly as possible, we put in place support for our customers, making emergency cash available in our branches or via telephone. The next priority for us was to ensure that all impacted customers were remediated as quickly as possible. To ensure no customer was left out of pocket due to this event, we refunded all fees and charges applied on all customer accounts for the day the issue occurred.
On our retail transformation programme, over the last few years we have seen huge change in the way our customers are choosing to do their banking. We are seeing more and more customers using online and mobile applications for day to day banking as opposed to the more traditional branch-based transactions. All of this behaviour is driven by the desire for quick and convenient access, when and where customers want it. Importantly, we expect this type of change to continue. That is not to say that branches and counter service do not have a role to play. They remain an important part of our customer service offering and approach, which is why we are taking the opportunity to invest in an improved look and feel in our network. While we are not closing branches in 2018, as I have previously indicated, this remains under constant review.
On mortgages and mortgage products, we launched our First Five mortgage campaign with a range of benefits tailored to meet the specific and practical needs of first-time buyers. It offers five key benefits, including €25,000 life insurance cover at no cost to the customer; 50% off home insurance so that customers have the right level of cover to protect their home and family; low fixed rates from 2.85%; a €1,500 contribution towards legal fees; and free valuations. We have also reduced the rates on a number of our fixed rate mortgage products, offering the lowest rate in the market, at 2.5%; simplified our mortgage loyalty offering; and, increased the interest rate on our one year fixed term deposit account.
We remain committed to our ambition to serve our customers and attract new ones by becoming number one in customer service, trust and advocacy. Reflecting the ongoing Royal Bank of Scotland, RBS, commitment to Ulster Bank and the work we have done to strengthen our business, Standard & Poor's upgraded its long-term credit rating for Ulster Bank to BBB+ or positive outlook. This follows the recent affirmation by the other credit ratings agencies, including Fitch's credit rating at BBB with the outlook revised to positive on 18 May, and Moody's upgrade to BAA1 or stable outlook on 1 May. All three major credit ratings agencies have taken positive action, reflecting the progress we are making on our strategic priorities, particularly the strength, sustainability and the simplification of the bank and supporting our growth. We also reached an important milestone in building a more sustainable bank, raising €1 billion from a recent sale of mortgage-backed bonds which will provide more funding to lend in to the Irish economy. Our focus remains on ensuring that Ulster Bank is best positioned to compete and grow for the benefit of our customers and shareholders, while seeking to regain customer trust by addressing and learning from the mistakes we have made in the past.
My colleagues and I look forward to members' questions.