PTSB profit recovery eclipsed by overcharging scandal
Last week's humiliating climbdown by Permanent TSB overshadowed good first-half financial results from the state-controlled bank
As corporate grovelling goes, this was down there in the nose-in-the-muck category. On Tuesday Permanent TSB, the 75pc State-owned mortgage bank, announced that it was "truly sorry" and offered an "unreserved apology" to almost 1,400 customers whom it had overcharged.
While the PTSB's contrition was welcome, it was also very belated. The complaints of customer overcharging had first been made to the Financial Ombudsman as far back as 2009 - but the Permo fought the case every inch of the way, appealing the Ombudsman's decision to the High Court, which ruled in favour of the Ombudsman in 2012.
Undeterred, the PTSB dug its heels in.
It appealed the High Court ruling to the Supreme Court before finally throwing in the towel last February. The cost of fixing the mess has been estimated at €55m - made up of €35m in compensation payments to the overcharged customers plus a fine of up to €20m by the Central Bank.
Unfortunately the Permo's climbdown came too late for 22 of the overcharged customers who lost their properties.
So what now for the PTSB? Chairman Alan Cook and chief executive Jeremy Masding are, despite their "unreserved apology", refusing to quit - arguing that the mistakes were made before their time.
While this is certainly a valid defence in the case of the original over-charging - which took place in the late noughties - what about their roles in the decision to fight the Ombudsman's decision all the way to Supreme Court, a decision which prolonged the suffering of the affected customers and will almost certainly increase the eventual cost of settling the affair to the Permo?
"The reason for the appeal is that the High Court said that a retail bank, which is an execution-only business, had a duty to provide advice to its customers", says Mr Masding, who goes on to say that he would have "no compunction" fighting a similar case again.
So why last February's decision to abandon the Supreme Court appeal?
"When you get an enforcement investigation from your regulator [the Central Bank] there is no way you can run a court case in parallel," according to Mr Masding. He also says that once the enforcement action was launched the "complexity" of the case became apparent to the Permo.
All of which sounds as if the company wisely concluded that it couldn't fight City Hall.
The fallout from the overcharging affair meant that the PTSB's half-year results, which were published on the same day, passed virtually unnoticed. According to the Permo, it recorded an "underlying" profit of €1m in the six months to the end of June. "This marks the group's first profit since 2007", proclaimed the results statement.
On closer examination it would appear that there was somewhat less to the PTSB's "profits" than meets the eye.
Things certainly improved at the group during the first half of 2015. Net interest income, the difference between the interest the bank received from its borrowers and the interest it paid to its depositors, rose from €126m in the first half of 2014 to €158m for the same period this year.
At the same time as net interest income was increasing, the PTSB's operating expenses were falling. It paid out €137m on administration, staff and other costs in the first six months of this year, down from €172m from the same period in 2014.
This combination of increased net interest income and lower operating costs were the main contributors to the PTSB's first-half operating profit of €25m before exceptional charges and loan impairments as against a €22m loss a year ago. Unfortunately a hefty €432m exceptional charge turned the first-half operating "profit" into a loss of €407m.
The PTSB had better news to report on the loan loss front. After writing off a total of €3.6bn against bad loans over the past five years, including €149m in the first half of last year, the impairment charge this time out fell to just €24m.
However, despite the lower impairment charge, the PTSB still has a huge volume of problem loans on its books.
At the end of June it had almost €6.1bn of impaired loans on its balance sheet with a further €847m of loans in arrears but not categorised as impaired. Between them these impaired and overdue but non-impaired loans accounted for almost 29pc of its total loan book of €22.9bn.
Just for good measure the vast bulk of the PTSB's €22.5bn mortgage book is tied up in low-margin trackers, where the interest rate is tied to official ECB rates.
At the end of June €12.7bn (65pc) of its €19.5bn Irish mortgage book consisted of trackers while virtually all of its €3bn UK mortgages are made up of trackers.
So how, with such a high proportion of trackers and impaired mortgages on its books, was the PTSB able to persuade private sector investors to buy €400m worth of shares in the company last April?
What did investors see in the Permo - the share offer was over-subscribed - that wasn't immediately apparent from its half-year results?
The PTSB under Masding (who took over as chief executive in 2012) has been a work in progress. He is gradually paring the bank back to its core Irish operations. Since he took over the group's loan book has been cut from €33.6bn at the end of 2011 to just €22.5bn at the end of June 2015.
And it will be reduced further. The new-look Permo will be built around its Irish operations which had a €19.5bn mortgage book at mid-2014. This means that the new-look Permo will be at least 40pc smaller than it was before the banking crisis struck in 2008.
While the PTSB still has many legacy issues, the Irish housing market is gradually recovering. Not alone have prices been rising for over a year; transaction volumes are also growing strongly.
According to the Property Price Register, 21,425 houses and apartments changed hands in the first half of 2015, a 34pc increase on the same period last year. If this rate of increase is sustained for the full year, then close to 60,000 properties will be transacted in 2015, more than three times the 18,351 housing transactions recorded in 2011.
This means there is once again a genuine housing market to which the PTSB can lend, rather than the zombie market we saw a few years back.
As a result, new mortgage lending is also beginning to recover. Having fallen by almost 95pc from its 2006 peak of €40bn to just €2.5bn in 2013, total new mortgage lending by all of the Irish banks rose by 55pc to €3.85bn in 2014.
The latest figures from the Irish Banking and Payments Federation show that new mortgage lending by the Irish banks rose by a further 73pc to €983m in the first three months of this year.
The PTSB has benefited, but so far only marginally, from this gradual recovery in new mortgage lending - with new mortgage lending at its Irish operation increasing by 5pc to €187m in the first half.
Masding expects this growth in new mortgage lending to continue to at least €8bn by 2018, of which about 15pc (that is, €1.2bn) will be lent by the Permo. Masding is also optimistic that many of the legacy issues facing the group will gradually fall away in the coming years. Of PTSB's €6.8bn stock of impaired and/or overdue loans, almost €4bn are Irish residential mortgages.
However, according to its chief executive, the bank has put in place "long-term treatments" (mainly split mortgages where a portion of the loan is "parked") with most of these.
But under current bank accounting rules, the "parked" portion of the split mortgage must still be categorised as a "non-performing" loan. When these split mortgages are taken into account the underlying level of non-performing loans falls from almost €4bn to "only" €1.2bn, he argues.
The Permo will also be boosted by the end of the ELG - also known as the deposit guarantee.
ELG payments to the Government cost the bank €59m in 2014 but only €9m in the first half (down from €32m in the first six months of 2014).
Other gains that the PTSB can look forward to include no longer having to set aside €60m a year to meet the cost of the Government's convertible contingent capital notes (these were repurchased with the proceeds of the share issue) and the end of the €30m annual goodwill charge on the former Irish Nationwide deposit book by 2018.
Lower interest rates have also been good news for the Permo, allowing it to cut its cost of funds.
To those who point to its continuing reliance on trackers, Masding responds that the net interest margin at the core Irish bank widened by 10 basis points (0.1pc) to 1.31pc.
This means that, while the Permo may still not be making a lot of money from its tracker book, it isn't losing money either.
"We promised that we would get our cost/income ratio down to 50pc [it was 85pc in the first half]. There is still some heavy lifting to do", said Masding.
Of course, the overcharging scandal notwithstanding, the Permo has one other thing going for it. With most of the foreign banks having either exited the Irish market completely (Bank of Scotland/Halifax) or drastically scaled back their operations in this country (RBS/Ulster), if PTSB didn't exist then the Government would come under enormous pressure to invent something very like it in order to maintain some modicum of competition in the personal banking market.
Sunday Indo Business