NatWest is preparing to start a phased withdrawal from the Republic of Ireland after more than a century in the country, in a move to free up capital and focus on its core UK market, according to people familiar with its plans.

The bank, formerly known as Royal Bank of Scotland, is expected to announce a gradual exit from the country, where it is the third-largest bank and operates under the Ulster Bank brand, when it reports its annual results on Friday.

NatWest started reviewing the business last year. Ulster has 15 per cent of the Irish mortgage market, nearly 20 per cent of SME business lending, and a loan book of about €20bn. Its Northern Irish business, which also uses the Ulster Bank brand, will not be affected.

NatWest will become the latest in a string of foreign lenders to pull back from the Irish market in recent years, following companies such as Rabobank, Danske Bank and Lloyds Banking Group. Its exit will further concentrate the role of the Irish government in the sector. It holds large stakes in the two largest remaining banks — Allied Irish Banks and Bank of Ireland — and in Permanent TSB, a smaller lender.

NatWest is under pressure from Irish authorities to ensure the mortgage and business loan books are sold to active lenders to maintain competition in the market.

The Irish parliament’s finance committee this week highlighted concerns that a withdrawal “would impact negatively . . . on staff, customers, banking services and competition in the market”. It said the Central Bank of Ireland had also raised concerns about the impact on competition.

In October, NatWest said it was not in talks to sell the business to Cerberus, a private equity group which has become a political flashpoint after buying up large volumes of Irish banks’ distressed debt. A person close to the bank confirmed its position had remained the same since.

Analysts believe NatWest could free as much as €1.6bn in excess capital by leaving the Republic, where lenders are required to hold more capital than international peers after huge public bailouts in the wake of the financial crisis.

The strict rules and competition in the market mean the Ulster Bank business has become an increasing drag on its parent company’s results. Ulster Bank ROI generated a return on equity of just 2.3 per cent in 2019, compared with 9.4 per cent across the whole NatWest group.

One senior UK banker said: “It is an open wound for them, they’ve been trying to get out for years, but can’t just walk away from Ulster, the regulator simply won’t let them.”

Diarmaid Sheridan, an analyst at Davy stockbrokers in Dublin, said: “Ulster Bank has a lot of surplus capital today. It’s a decent amount of NatWest’s [total] surplus capital. Returning that to shareholders is a strategic imperative.”

“Within banking circles in Dublin, the belief is that some form of exit will be the conclusion,” he added.

NatWest said in a statement: “We continue to evaluate the impact of Covid-19 and the challenges to the economy and we are reviewing our strategy appropriately and responsibly in light of these events.” Any changes would be made with consideration of their impact on all stakeholders, it added.

A withdrawal will mark the second major restructuring to be announced by NatWest chief executive Alison Rose since she took charge of the group in late 2019. This time last year, the company announced it would drastically shrink the size of its investment banking unit.

The company is also in talks to sell part of its Adam & Co. private banking arm and fold its remaining business into its larger Coutts business, according to one person familiar with the plans. The talks were first reported by Sky News.