Thursday 19 April 2018

Would you buy into the Permo?

Permanent TSB is on the way back to private ownership. So is the bank a good investment? We canvassed the experts

PTSB. Photo: Niall Carson/PA
PTSB. Photo: Niall Carson/PA

Calvin McLoughlin and and John Reynolds

Permanent TSB is looking to become the first nationalised Irish bank to return to the stock market. Its success or failure will say much about the true state of the banking sector. Has there been a genuine recovery, or are all the positive noises from insiders just spin?

The management team led by Jeremy Masding has met around 100 potential investors and D-day is drawing near - pending a shareholder challenge to the bank's capital raising plans.

So is it time to buy in to Permanent TSB? We asked a former chairman, analysts, ex- bankers and some seriously shrewd investors:

The analysts

Fiona Hayes, chief economist and head of financial research, Cantor Fitzgerald Ireland

"It totally depends on what price it comes at but my assumption is that it's going to be priced to go, sold almost as a distressed asset even though there's significant recovery potential in the coming years.

"I think it will be priced significantly cheaper than the underlying value of the company, in recognition that it's going to be three or four years before you're back on a sustainable profit trajectory.

"The investment story is very solid. I've crunched through the numbers and the bank has outlined all these targets for 2018, I think they're very achievable if not even maybe a little bit on the light side. They may even over-achieve on those targets.

"We're in an Irish banking landscape that's very consolidated. They can have a relevant and meaningful presence and good growth in the Irish mortgage market going forward. They certainly can get back to profitability by 2017. It might not happen next year because of losses on the rest of the deleveraging, but I think by 2017, 2018 they'll be showing very decent profitability.

"We're bullish on the Irish economy and we think the credit cycle is near an inflection. They're well-placed to benefit from that.

"It's the beginning of a recovery cycle for a company which has a little bit more work to do in terms of offloading its non-core assets, but can recover quite quickly once it does the work of that next year."

John Cronin, equity analyst at Investec Ireland

"PTSB delivered a substantially improved performance in fiscal-year 2014 and the bank is now on an accelerated path to normalised profitability.

"We think PTSB is well-placed to take advantage of above-average return opportunities once new lending takes hold in earnest. It's a good time to be an Irish bank.

"Management's targets... are undemanding in our view and we expect these to be significantly exceeded.

"Despite net writebacks in FY14, we believe management has taken a cautious approach to provisioning and see much scope for further writebacks from here.

"Potential investors are likely to require a premium return for investing in PTSB to reflect, in the main, the fact that the turnaround is at an early stage, to account for the risk that deleveraging causes a greater-than-expected adverse capital impact, and in relation to uncertainty regarding the quantum and timing of provision writebacks.

"The question as to whether all of the surplus capital build will be capable of release is also very important from a valuation perspective. We have not formulated a final view on the appropriate valuation range at this stage."

David Madden, market analyst, IG

Permanent TSB has survived the financial crisis with the assistance of the Irish Government but it's not out of the woods yet by any stretch of the imagination. The failure of ECB stress test at the back end of 2014 just really highlights the problems the bank has to overcome, when in comparison AIB and Bank of Ireland passed that exact same stress test.

"The recent move to bring in to place a stock consolidation or a reverse stock split - you got 1 share for every 100 you held - seems to me like they're looking to re-brand the image of the company. The share price went from 6c a share to €6 a share. And it seems to me this is the beginning of a marketing ploy for the actual company itself, to kind of re-brand the image as a bank that's emerged from the financial crisis and is slowly and steadily growing.

"When you see a share price as 6c a share it kind of psychologically indicates that it's a penny stock, high-risk, it almost instantly has a negative reaction. Whereas the likes of RBS and Citigroup in the US did similar moves to create a more positive image from an investment point of view.

"As the Irish government does unwind its very large position in Permanent TSB, the share price will eventually start to free up and effectively the invisible cap that has been placed on the share price will eventually be moved higher.

"This is very much a long-term investment."


John Bourke, former chairman of Irish Permanent

"I was of course a shareholder, and I know the difficulties they've had and I know some the difficulties they still have with tracker mortgages and so forth. However, I do believe that the resurgence of Bank of Ireland, which I think will be followed in reasonable time by the resurgence of Allied Irish Banks, is going to draw up Permanent TSB with it. I believe that therefore, Permanent TSB will look forward to a very good future in due course.

"The legacy of the past has to be eroded over time but I think as and when that is done, another competitor like them is needed and I think the market is there for them, as the country emerges. I'll certainly probably buy a few shares again and put my faith in them. That's not a stockbroker's advice, I'm retired and I'm out of the game but I think they will come back into profitability in the next few years. You know the old saying, a rising tide lifts all boats. I think they could do very, very well as a people's bank which I think is needed.

"When we floated we were the first building society to demutualise and float on the stock exchange. But of course we were pretty profitable and growing pretty rapidly at the time, and therefore it was a very simple proposition for a stock market flotation once we had demutualised.

"There it was, the biggest of its kind, very profitable, established place in the marketplace for many decades, a very well-known name. It had a lot going for it. In this instance of course, the profit record is not there. I believe from what I read that the business is improving, and they're getting a good foothold and so on, but they are coming from behind the eight ball rather than in front of it, which we were.

"I know people lost a lot of money in banks in the recession and so on, but people seem still to be interested and I think this flotation will succeed. I think people will invest in the banks again."

Alan Merriman, chief executive and founder, Elkstone Private Advisors and former EBS finance director

"No, I don't think it would be a good investment. Instead I would guide your readers to be more global, avoid the risk of individual names and stick to low cost market indices and exchange traded funds (ETFs).

"Of the many thousands of stocks out there, does Permanent TSB really have the moat, the financial strength, the compelling upside to justify it being picked ahead of others? Maybe, but not for me.

"By contrast, our clients at Elkstone tend to prefer relative value and contingent downside protection strategies than being say solely long equities, we do presently have an allocation to the KRE ETF - it is one that is focused on regional banks in the US. We like the fundamentals and our technical analysis is supportive too.

"The improving economy and expected higher interest rates there will be key drivers and with higher dividends in due course the sector should outperform over the next two or three years."


Tom Noonan, chief executive at the Maxol Group

"Speaking personally, there's every chance that it would be a good investment. The improvement in performance of the business is striking, so it might be a good punt if someone had money they didn't mind risking.

"But there's also a risk that the taxpayer could lose out if this is a case of the government selling shares at too low a price and selling them too early. There's an argument to be made that they should wait about another year.

"That said, the sooner it's sold and goes private again, the better. We need to see much more competition in the Irish banking market - and this move could help us to see that in the future.

"There's an argument that given what they're doing with their mortgage rates, perhaps they're not a great competitor at the moment - but if a significant investment was made, there's a chance they could use that funding to become an aggressive competitor in the market."


Eamonn Quinn, RTE Dragons' Den investor, head of Quinn family investment fund and former deputy chairman, Superquinn

"I think it's good to see the shares back on the market and the beginning of the government exiting their stakes in the banks.

"I'd suggest that it's more aimed at institutional investors who want exposure to the Irish mortgage market, rather than smaller ones.

"It's the smallest player in the market and needs a continued recovery to be a success. Still, it's probably not one for the widows and orphans fund just yet though."

Ray Nolan, technology super-investor and serial entrepreneur, who sold his WRI for over €200m to Hellman Friedman

"I wouldn't touch them with a barge pole."

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