Tuesday 21 January 2020

Deciding PTSB's future

Jeremy Masding chief executive, ptsb

Newly appointed boss Jeremy Masding will determine whether the loss-making bank can rebuild itself against all odds

WITH the bank just after announcing 2011 loan losses of more than €1.4bn, it has been a baptism of fire for new Permanent TSB boss Jeremy Masding.

When the banking crisis erupted in 2008, it seemed for quite a while that Irish Life & Permanent and its banking subsidiary Permanent TSB would be the one that got away.

With a profitable life assurance subsidiary -- Irish Life -- and unencumbered by bad loans to builders and property developers, the share price initially held up quite well, trading above €5 as late as October 2009. Even the disclosure in February 2009 that IL&P had helped Anglo to pretty up its balance sheet the previous year, which led to the resignation of chief executive Denis Casey, failed to completely undermine investor confidence in the company.

However, while the other Irish banks -- AIB, Bank of Ireland, Anglo and Irish Nationwide -- were stuffed with bad property loans, Permanent TSB had a pair of timebombs of its own ticking away in its balance sheet.

Having grown the size of its Irish mortgage book from just €12bn in 2003 to €27bn in 2007 -- a 125pc increase in the space of just four years -- Permanent TSB was left very vulnerable when the credit crunch first struck in August 2007. This was because instead of funding the increase in its mortgage book the old-fashioned way by taking in more customer deposits, it borrowed short-term on the inter-bank market instead.

As a result, the proportion of its total customer loan book that was funded by deposits fell from a relatively healthy 69pc at the end of 2003 to just 34pc at the end of 2007. When banks effectively stopped lending to one another in 2007, Permanent TSB, most of whose loan book was tied up in long-term mortgages, was caught in a liquidity squeeze.

Which, translated into plain English, meant that Permanent TSB had made the classic banking mistake of borrowing short to lend long.

Unable to roll over loans from other banks as they came due for repayment, Permanent TSB became increasingly reliant on emergency funding from the ECB and the Irish Central Bank for its very survival. At the end of last year, just over half of Permanent's TSB's €33.6bn loan book was funded by such emergency support.

Its failure to grow its deposits in tandem with its loan book wasn't the only potentially existential problem facing Permanent TSB. It also had an estimated €22bn of tracker mortgages, where the interest rate paid by the borrower is tied to the official ECB rate. These trackers, which are costing the group at least €400m a year, mean that Permanent TSB is inherently loss-making even before providing for loan losses.

The roof finally fell in on Permanent TSB at the time of last year's bank stress tests which determined that it needed an extra €4bn. This could only come from the taxpayer, with the result that IL&P is now 99.2pc state-owned and the State has compulsorily acquired Irish Life, its only profitable arm, for a notional €1.3bn.

Shorn of Irish Life, the rump IL&P has now been effectively reduced to Permanent TSB, a zombie bank with an irretrievably broken business model. Does it have a future or will it, like Anglo Irish and Irish Nationwide, be closed to new business and its existing loan book wound down?

Mr Masding will be the person who answers that question. He was appointed chief executive of Permanent TSB in January. His job will be to determine whether or not Permanent TSB has a future.

A native of Norwich, Mr Masding joined Barclays Bank straight from school in 1984. Apart from a year in the UK Cabinet Office between 1998 and 1999, he stayed with Barclays until 2007. He worked his way up through the ranks, becoming successively director of strategy and a board member of Barclaycard.

His time at Barclays was not without controversy as it included a term as chief executive of FirstPlus, a sub-prime lender that used advertisements fronted by Carol Vorderman to persuade people to roll all of their existing debts into mortgages secured on their homes. FirstPlus was widely criticised at the time for encouraging people to put their homes at risk. FirstPlus closed for business in 2008.

A year earlier, Mr Masding left Barclays after 23 years, and become chief executive of Central Trust, a specialist UK lender. This was, a bit like Permanent TSB, the sort of business that was absolutely clobbered when the interbank market dried up in 2007.

Instead of the hoped-for expansion, Mr Masding's time at Central Trust was marked by cost-cutting and restructuring and he left the in 2009. Since 2010 Mr Masding had been chairman of loan broker Richmond Group and a self-employed financial consultant.

Mr Masding's appointment was not entirely without acrimony. David Guinane, who had been Permanent TSB chief executive when it was an IL&P subsidiary, also applied for the job and left the bank when he was overlooked for the position.

So can Mr Masding fashion a profitable business from the Permanent TSB wreckage? The omens are not good. As it struggled desperately to stay afloat in recent years, Permanent TSB ruthlessly squeezed its variable rate borrowers. Its standard variable rate is now a vertiginous 5.3pc, by far the highest rate charged by any Irish lender.

At the moment, most of these unfortunate homeowners are effectively trapped but it's hard to see many of them staying with Permanent TSB once alternative sources of mortgage credit become available. Far more likely is that, once conditions do improve, there will be a steady haemorrhage of existing customers.

SO can Mr Masding persuade the Department of Finance and the troika that Permanent TSB has a viable future? He has already commissioned Bain Consultants to conduct a root and branch review of the bank's operations.

Can Permanent TSB be restored to a position where it can fund itself and start lending once again? The big advantage of appointing an outsider such as Mr Masding is that he comes to the job without any loyalties and is thus open to all possibilities, including recommending that it be shut down.

Working in Permanent TSB's favour will be the Government's desire to preserve some semblance of competition in a rapidly consolidating banking market. However, with its funding difficulties remaining acute and the sale of its UK mortgage book having fallen through, is keeping Permanent TSB alive worth the bother?

Might it not make more sense to fold what's left of Permanent TSB after its tracker mortgages have been "parked" with IBRC into Bank of Ireland? If Mr Masding recommends shutting down Permanent TSB then he could become the shortest-serving Irish bank chief executive ever.

Irish Independent

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