PTSB says Brexit referendum fears have hit UK mortgages sale plans
Permanent TSB has enjoyed a profitable start to the year, but has warned of the impact of regulatory costs, low interest rates and the need to fund its UK mortgage book for longer than planned.
The bailed-out bank claimed market dynamics have changed in the UK mortgage market, with Brexit blamed as a factor. And it warned the challenges could mean that the bank misses its target of generating return on equity of around 10pc by 2018.
In an interim management statement, the lender said its core net interest margin (NIM), the difference between the interest the bank gets from borrowers and what it pays savers, and a key measure of its earning power, improved to 1.75pc for the first three months of the year, primarily because of the reduction in the cost of funds.
But the latter is expected to increase over the course of this year due to the delay in off-loading the residual UK mortgage book, and a reduction in European Central Bank funding.
New mortgage lending grew by 4pc to the end of April on a year-on-year basis, but it warned that this was still constrained by "limited growth" in the mortgage market.
Davy Stockbrokers said it was moving its rating for the bank from 'outperform' to 'neutral' primarily because of the heightened uncertainty over the timing of UK mortgage book sale.
"This latter issue weighs heavily on the bank's path to normalised returns and is a key driver of the revision in our rating from 'outperform' to 'neutral," said Davy analyst Emer Lang. The bank said that the Group's new mortgage lending grew by 4pc to the end of April.
A new mortgage proposition (the bank announced in January that it would pay a cash lump sum to those who take out a home loan) has had a "positive" response from customers, resulting in a 10pc increase in mortgage applications and 4pc increase in mortgage drawdowns by the end of April.
"However, growth in the mortgage market in Ireland continues to be subdued primarily as a result of the constrained supply of housing," the bank said.
The IMS said the Group continues to face a significant regulatory cost challenge arising from required contributions to the Single Resolution Fund and the Deposit Guarantee Scheme. That's expected to add up to €35m to its cost base this year.
Total customer deposits continue to represent the major source of funding for the Group, with retail deposits amounting to 55pc of total funding.
"The Group's financial performance will be impacted by external factors such as increasing regulatory costs, a more modest growth outlook in the mortgage market given the ongoing constrained supply of housing in Ireland, and a sustained low interest rate environment, which has impacted bank earnings across Europe," the bank said.
"These factors, coupled with uncertainty around the timing of the sale of residual UK assets, mean that the Group may not generate a return On Equity of c.10pc by 2018 as previously guided."