Business Irish

Monday 24 September 2018

Richard Curran: PTSB's €4bn loan sale is a hard but necessary pill to swallow

PTSB chief executive Jeremy Masding was keen to reduce the bank’s non-performing loan ratio
PTSB chief executive Jeremy Masding was keen to reduce the bank’s non-performing loan ratio
Richard Curran

Richard Curran

Permanent TSB chief executive Jeremy Masding signalled in the middle of last year that the gloves were coming off when it came to finally sorting out the bank's legacy non-performing loans issue.

It isn't that the bank has not dealt with the issue up to then - it has. It restructured mortgages. It adopted longer term forbearance measures. It also stalled all mortgage litigation against customers while the tracker mortgage scandal has been rumbling on.

But clearly by last summer, Mr Masding had had enough. "We have a high NPL (non-performing loan) ratio of 28pc 10 years after the financial crisis. We now need to think about how we shrink that ratio down because in the long term it is not a signal of a bank's strength."

The bank intended to use a number of strategies - including portfolio sales, foreclosures and higher repayment requirements - to reduce that level over the medium term.

This change of tack came after the lender reported a profit before tax of €43m for the first half of last year, which was down by 60pc on the same period in 2016.

After much speculation that it was preparing to sell a €1.2bn buy-to-let loan book, it now appears that Mr Masding is preparing to triple that by offloading around €4bn worth of mortgages.

These are divided into two portfolios: around €1bn of "untreated" (probably pretty awful) buy-to-let mortgages, known as Project Nepal; and about €3bn of loans some of which have been restructured, while others are untreated owner-occupier loans, dubbed Project Tibet.

PTSB, hired EY in September to advise on options. It hires lots of consultants and has spent tens of millions on them in the last six years.

The proposed sale is already causing a political stink, especially on the back of the banks' collective appalling behaviour in the tracker mortgage scandal.

However, what is Mr Masding to do? Critics say people will lose their homes if the mortgages are sold to vulture funds. They may well be sold to other banks. But equally, some of these mortgages are in such deep trouble, that owners have not engaged with the bank despite being in arrears for seven years.

The mess that current management inherited from the boom days was truly shocking. PTSB was addicted to the wholesale funding market and pioneered the tracker. So it was borrowing short-term money from abroad, to offer people long-term mortgages at interest rates which tracked the ECB book.

At the start of the crash it loan-to-deposit ratio was 300pc, which meant it had lent out three times in borrowed cash, what it held in customer deposits.

If boom era management had set out to booby trap the business, they couldn't have done a better job. But now in 2018 the legacy mess is still there. The State has got a couple of billion tied up in this bank. PTSB has significantly improved its product offering and it is providing genuine competition in the marketplace.

If getting back our €2bn wasn't a good enough reason to ensure its success, then providing competition is.

However, this bank will never pay back the taxpayers what they are owed unless it is given a chance to escape from its past.

Should this be done at the expense of customers who want to keep their homes? That is a difficult and painful question for a lot of people still trapped in the mistakes of the past. Yet, it is still very hard to secure a repossession of a family home in Ireland. There have been relatively few. This is unlikely to change after this sale.

Someone who has not paid their mortgage or engaged with the bank for seven years, has been storing up trouble for themselves.

Homeowners have the right to reasonable levels of protection. And many protections are in place. But the crash happened over a decade ago. People have to be able to move on. This loan portfolio includes some mortgages which were restructured and have since got into trouble again. That is unsustainable for everyone, including the bank. There is a very real danger that other banks will follow suit with similar loan sales. It is impossible to move on from the crash without some kind of resolution of these long-standing issues.

More punters taking the long steady way to invest in property

The housebuilding market may not have moved on quickly enough since the crash, but the commercial property investing market has changed dramatically. Before the crash we had individual developers owning chunks of assets. Now those asset bases have been scattered to the winds as international funds have bought them on the cheap from sellers like Nama.

They have found their way into stock market vehicles such as Green Reit, Hibernia Reit, IRES Reit and Glenveigh Properties. Cairn Homes is also a stock market-listed builder and developer of housing units.

And they are to be joined by a new kind of investment vehicle on the stock market. Core Industrial Reit has said it will float on the Irish and London Stock Exchanges and hopes to raise €225m. It is targeting a market capitalisation of €250m.

Green, Hibernia, IRES, Glenveigh and Cairn have a combined market capitalisation of around €4.8bn.

Core Industrial will be a slightly different proposition. Backed by New York-based fund York Capital, it has a portfolio of 106 industrial assets and approximately 167 acres of land (including 36.7 acres of zoned and serviced industrial land) which it valued at €82.9m on November 30 last.

These are mainly located in the greater Dublin area and were acquired after the crash. Hedge funds like York Capital have had a tough enough time in recent years as investment returns slackened.

This IPO should provide a good opportunity for some liquidity placing a value on gains made. Investing in industrial properties can be a lucrative business and the sector has performed well in recent years.

However, returns might be slow. The existing leased units are unlikely to be very large and there are always risks on the horizon for industrial companies.

One of those could be Brexit. Equally, Brexit should bring new opportunities. Green Reit is investing heavily in its logistics park near Dublin Airport, so having real diversification in the Core portfolio will be important if it wants to reduce any downside risk, while catching the upside.

Either way, it is very positive to see such diverse investment opportunities in the property sector that are based on long term return, instead of a get rich quick scheme.

Danish deliver clear Brexit facts

The Danes tells it straight on most things. As for Brexit, the latest research from Copenhagen Economics, suggests it may not be as bad as some would fear. The research, commissioned by the government and published last week, makes the case for how vulnerable certain sectors are.

It found that in the event there is no deal and trade reverts to World Trade Organisation tariffs, then around "20,000 jobs will be reallocated between sectors."

Most jobs will be lost in agri-food (-12,400), some in manufacturing and construction (-6,300), and some in wholesale/retail and air transport (-1,300), while most of the reallocation will be to other services.

These are pretty big sectoral hits. According to the consultants, this is equivalent to job churning of approximately one per cent of the Irish labour force over 10 years.

However, what impact might Brexit have on GDP? In a WTO rules scenario it could reduce Ireland's GDP by around 7pc or €18bn by 2030. However, under the more likely scenario of a customs union trade deal, that drops to 4.3pc or €11bn.

Bear in mind the consultants have pencilled in average annual economic growth of 2.2pc per year for Ireland over 15 years. There may also be some investment and job gains from Brexit.

Copenhagen Economics marketing logo says: 'Hard facts. Clear Stories.' Perhaps it is time the Brexiteers hired these guys.

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