Ciarán Hancock: Permanent TSB basking in positive light

It's amazing how the fortunes of Permanent TSB have changed in the past six months.

Last October, the bank was fingered by the European Central Bank’s stress tests as needing to fill an €855 million deficit in its capital. It was the only bank in Ireland to flunk the exam.

At the time, PTSB chief executive Jeremy Masding noted how most of the deficit had already been bridged through various actions and the real sum it needed was €125 million. Masding spoke confidently about being able to raise that amount and more from private investors but there must have been an alarm bell sounding in the back of his head.

After all, PTSB had been off the investor radar since its €2.7 billion State bailout in 2011. There was no guarantee that anyone would believe the bank's recovery story (the European Commission hadn't even approved its State-aid restructuring plan at that stage), never mind write him a cheque.

There was also a view investors would want up to 40 per cent of the equity in return for investing in a loss-making bank with €15 billion worth of low-yielding tracker home loans, substantial mortgage arrears and a raft of legacy assets dragging on its bottom line.

So yesterday’s update on its €525 million capital-raising plan was pleasantly surprising. Such is the interest from the 108 investors canvassed by the bank’s senior executives that PTSB is able to price in a way that only 25 per cent of the State’s share is likely to be handed over. And that could require a parallel top-up sale by the State to ensure that PTSB’s free float hits 25 per cent, a requirement for a listing on the main markets in Dublin and London.

The lender has been marooned in the junior ESM market in Dublin for the past four years and needs a main market listing to be taken seriously. This is all positive for the Government. PTSB had signalled last month €400 million of the capital raising would be used to repurchase the contingent capital notes (CoCos) from the State as a first step in repaying its bailout money.

IPO pricing

It seems taxpayers will get some added cash via the additional sale of shares, while retaining a 75 per cent stake in the bank.

The final pricing of this IPO will decide how much the State ultimately takes off the table this time around, and the value of its residual stake. It's still a stretch to think that we'll get back the entire €2.7 billion in bailout funds but the picture is at least brighter than in October. The success of PTSB's capital raising also bodes well for the State's plan to get some money back from AIB, which received an altogether more chunky €20.8 billion bailout.

AIB is of a completely different scale to PTSB but it makes the prospect of an IPO this year more likely, along with some resolution to the €3.5 billion in preference shares and €1.6 billion in CoCos held by the State. These are positive developments for a Government in election mode, which has told us repeatedly we will get back all of the €30 billion or so given to AIB, Bank of Ireland and PTSB.

Ironically, with lots of money potentially sloshing around, it might heighten calls for the Government and the banks to assist the tens of thousands of account holders in mortgage arrears, and the thousands of standard variable interest rate customers who feel ripped off.

In its capital-rasing document yesterday, PTSB referred to the political and regulatory focus on the pricing of its variable rate mortgages and the “significant pressure” being brought to bear for it to reduce its interest margin.

“While the group is fully cognisant that its mortgage pricing decision framework should take account of all stakeholders, it will continue to review its pricing and product strategies on a commercial basis with full consideration of long-term sustainable shareholder value creation,” the bank said. Make of that what you will.

The noise around arrears and rates might explain the emergence of the Irish Moral Hazard Organisation (the IMHO acronym is a play on David Hall's Irish Mortgage Holders' Organisation), who say it "beggars belief" the Government is "considering using taxpayers' funds to pay the mortgages of those who cannot or will not pay them for themselves".

There’s a lot of votes at stake, whichever way the Government turns. Floating PTSB and AIB looks like a piece of cake when compared to resolving these thorny policy issues. Twitter: @CiaranHancock