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

Sunday Independent (Ireland) - Business & Appointments - - FRONT PAGE -

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.

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.

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

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