Business Irish

Friday 20 September 2019

Masding seeks PTSB cure as it reveals surprise lift in mortgage market share

Ten years on from the crash what does PTSB's future hold as it struggles with bad loans? writes Dan White

PTSB CEO Jeremy Masding helped clear up some of the uncertainty surrounding the bank when he was appointed in 2012, but he still has work to do if the lender is to secure its future
PTSB CEO Jeremy Masding helped clear up some of the uncertainty surrounding the bank when he was appointed in 2012, but he still has work to do if the lender is to secure its future

Permanent TSB released its third-quarter trading statement last Thursday. It revealed that while performing loans have increased "marginally" to €15.3bn at the end of September from €15.2bn at mid-year, they were unchanged from the end-2017 figures.

In other words, PTSB's lending is flat at best. This at a time when the Irish economy is the fastest-growing in Europe and with the ESRI predicting almost 3pc growth in private consumer expenditure this year, house prices rising at over 8pc annually and unemployment back to pre-crash levels.

However, it wasn't all doom and gloom at PTSB. Its new mortgage lending is up by 49pc this year compared to a 20pc increase in the overall mortgage market. This meant that its market share rose from 14pc in the first half of 2018 to 16pc in the third quarter.

"The trading statement was very positive. The gain in market share was a surprise," said Davy analyst Stephen Lyons.

However, despite the increase in market share, PTSB still has €2.9bn of non-performing loans on its books. This means that, even after the completion of the sale of €2.1bn of non-performing loans in the third quarter, almost a sixth of PTSB's loan book is still non-performing.

PTSB sources point out that what constitutes non-performing is very much a question of definition. Many of its 'non-performing' loans have been restructured as split loans or interest-only loans with the principal due to be repaid at the end of the term of the loan. Despite the fact that most of these borrowers are now adhering to the terms of their restructured or 'treated' loans, they are still categorised as non-performing.

Permanent TSB still has €2.9bn of non-performing loans on its books
Permanent TSB still has €2.9bn of non-performing loans on its books

Only so-called 'cured' loans, where the borrower has somehow managed to revert to the terms of the original contract by repaying all outstanding interest and principal, can be recategorised as 'performing'. Such 'cures' allowed PTSB to cut its non-performing loans figure by €100m in the third quarter.

While in the past a bank would been content to leave such treated loans on its books, even if it meant an elevated non-performing loan ratio, secure in the knowledge that the loan would eventually be repaid in full, that is no longer an option. The European Banking Authority has been pressuring PTSB to offload these loans.

PTSB has already offloaded one tranche this year and its promise to get its non-performing loan ratio down to 'single digits' in the medium term implies that at least half of the remaining €2.9bn of non-performing loans will also be sold off.

If, a decade on from the crash, this is the best that it can do, what, if any, future does the PTSB have? That's not how PTSB insiders see the situation. They point out that the bank was effectively in limbo for several years after the crash while the Irish Government and the Troika debated its fate. It was only when turnaround specialist Jeremy Masding was appointed chief executive at the beginning of 2012 that the uncertainty surrounding the bank's future began to clear.

In April 2015, PTSB raised €400m in an IPO which saw the State's shareholding fall from 99.2pc to 75pc. The shares were priced at €4.00 in the IPO. PTSB shares were trading at just over €1.90 last week. At least part of the blame for the fall in the share price since the IPO can be laid at the door of the EBA. By taking a tough line on the disposal of non-performing loans, even those where borrowers are now conforming to the revised loan terms, it has greatly reduced PTSB's scope to write back previous loan loss provisions.

That's all water under the bridge. With most of its legacy issues either having been already resolved or on track to be sorted out, what does the future now hold for the bank?

When the remaining non-performing loans are disposed of, PTSB's loan book will shrink to about €16bn-€17bn. What this means is that it is about a quarter of the size of AIB and only one-fifth the size of Bank of Ireland.

Can such a small bank survive on its own?

PTSB sources acknowledge that its relatively small size, compared to either AIB or Bank of Ireland, mean that questions will continue to be asked about PTSB's future. However, they point out that if the Troika had decided to let it go bust in 2011, there would have had to be another bank bailout, which would have resulted in the taxpayer having to write another multibillion-euro cheque.

Even at the current share price PTSB has a market value of €873m, valuing the State's shareholding at over €650m. What this means is that, even if it is ultimately sold, the Exchequer will receive a substantial payout rather than having to tap the taxpayer once again. PTSB returned to profit in 2017, recording full-year pre-tax profits of €62m. It reported a €57m pre-tax profit in the first half of 2018. The return to profitability combined with the sale of non-performing loans mean that its capital ratios are rising rapidly with its core equity tier one (CET 1) ratio climbing by 50 basis points (0.5pc) to 13.9pc in the third quarter.

The cleaned-up PTSB has 1.1 million customers, 77 branches and 2,400 staff. While it has been shorn of most of its legacy issues, its net interest margin (NIM) - basically the difference between the interest it receives from its borrowers less what it pays to depositors - was unchanged at just 1.77pc. This compares to a net interest margin of 2.51pc at AIB and 2.23pc at Bank of Ireland. True, as full-service banks the big two have a very different mix of business to PTSB but Masding needs to narrow the NIM gap between PTSB and AIB and Bank of Ireland.

If he succeeds then PTSB could be around for quite a while yet.

Sunday Indo Business

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