Friday 20 October 2017

TSB most exposed in credit crux

Bank has deposit-to-loan ratio closest to that of Northern Rock

As investors reassess bank shares in the light of the Northern Rock debacle, Permanent TSB, which funds less than 40 per cent of its lending from customer deposits, is by far the most vulnerable of the Irish banks to a sudden change in sentiment on the interbank market.

Friday's near-collapse of UK mortgage bank Northern Rock showed just how exposed banks are when other banks refuse to lend them money. It was only saved from a full-blown crisis when the Bank of England stepped in at the last minute and guaranteed to lend it cash.

Could it happen here?

Without detailed knowledge of the Irish banks' up-to-date balance sheets it's impossible to be sure. However, there are certain signals that investors and customers should look out for as warning signs of a possible crisis.

Northern Rock was felled by its dependence on the interbank market for funds. When other banks refused to roll over their loans, it very quickly started to run out of cash. At the end of June, it had £96.6bn of loans to customers outstanding as against customer deposits of just £30bn.

In other words, just 31 per cent of customer lending was funded by customer deposits. It was this extremely low deposit-to-loan ratio that alerted other banks to Northern Rock's plight and triggered this week's liquidity crisis.

By calculating the Irish banks' deposit-to-loan ratios it is possible to see which of them are relatively secure and which of them might be vulnerable to a Northern Rock-type meltdown.

By this yardstick, Anglo Irish is by far the most solid of the Irish banks. At the end of March it had customer loans outstanding of €57.9bn as against customer deposits of €45.3bn. This gave it a deposit-to-loan ratio of 78.2 per cent.

Just for good measure Anglo was a net lender to the interbank market with loans and advances to other banks of €12.9bn but only had €8.5bn of deposits by other banks on its books.

AIB and Michael Fingleton's Irish Nationwide also appear to be fairly robust with deposit-to-loan ratios of 65.8 and 63.2 per cent respectively.

Bank of Ireland doesn't appear quite so healthy.

At the end of March it had loans to customers of €125bn but customer deposits of just €72.2bn. That translates into a deposit-to-loan ratio of 57.7 per cent.

Analysts point out that Bank of Ireland also has a much larger proportion of its total loan book, about 47 per cent compared to AIB's 25 per cent, tied up in residential mortgages.

Most mortgages are priced off official rates, which means that during a period such as the current crisis where money market rates are much higher than official central bank rates, banks are making far less or may even be losing money, albeit only temporarily, on mortgages.

However, any problems BoI may be experiencing pale beside those of IL&P's banking subsidiary Permanent TSB. At the end of June, it had loans outstanding to customers of €36.7bn but deposits of just €14.4bn, a loan-to-deposit ratio of just 39.2 per cent.

The Permo's loan book, about 90 per cent, consists virtually exclusively of mortgages.

While IL&P has been busy reassuring the market that it isn't facing a liquidity crisis, its share price has been taking the strain, falling by over a third to just €15.80 since the end of February.

Among the major financial stocks, only Bank of Ireland, whose share price is down by 34 per cent over the same period, has performed as poorly.

IL&P failed to return calls seeking comment for this article.

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