Analysis: PSTB back in profit but big challenges remain

Permanent TSB’s first-half results were better than analysts had expected and marked the group’s return to profitability for the first time in nine years.

The €80 million after-tax profit was driven by net impairment writebacks of €61 million (Davy had forecast a charge of €10 million) and a €29 million gain on the sale of its share in Visa.

New mortgage lending rose 4 per cent to €211 million while its net interest margin, a key measure of profitability, came in at 1.43 per cent compared with 0.99 per cent in the first half of 2015.

These were offset by lower other income and rising regulatory costs, which is a real issue for a small bank such as PTSB.

Regulatory costs increased by €19 million as a result of contributions to the Single Resolution Fund (SRF) and the deposit guarantee scheme.

The bank said it anticipates potential increases in these costs, particularly to the SRF. The Irish bank levy of €27 million will be paid in October.

Its cost-income ratio rose by one percentage point to 87 per cent in the first half of the year and is still too high. A figure between 50 and 60 per cent would be its target.

While PTSB does not have an operating business in the UK, it does have a non-core, £2.3 billion buy-to-let mortgage book that it is required to sell under the terms of its European Commission restructuring plan.

The sale was to have been completed by the end of June but had to be postponed due to the effects of the Brexit referendum on the market. Britain’s decision to leave the European Union means there is no clear time frame for the sale.

To minimise its currency risk, PTSB recently put in place long-term, sterling-denominated funding covering the majority of these UK assets.

In terms of the outlook, the growth in the Irish economy provides a strong backdrop for PTSB’s future profitability.

However, challenges remain in the form of constrained mortgage market growth from limited housing supply, increasing regulatory costs and economic uncertainty caused by UK’s decision to leave the EU.

In a video posted on its website, PTSB chief executive Jeremy Masding described the return to profitability as a "milestone" for the company but said there would be "just one day of celebration" as "hubris is a dangerous thing".

This is a sensible position to take given PTSB’s recent chequered history. The bank has made a welcome return to profitability but a number of challenges remain to be overcome.