Making a Permanent future

It's just before 8.30 on Wednesday morning and there's a blizzard on St Stephen's Green where State-owned retail bank Permanent TSB has its head office.

"This is like summer to me," quips Welshman Jeremy Masding as he welcomes me into his office overlooking the Green. It used to be part of the old St Vincent's Hospital before that institution moved out to the Merrion Road.

Since 2008, it has been a sick ward of an altogether different kind as Permo slipped into a coma when the Irish economy crashed.

In 2011, as part of the old Irish Life & Permanent plc, it was given a €4 billion capital injection from the State to bolster its flagging capital ratios and provide cover for its multitude of problem loans.

Masding has been charged with reviving the patient and nursing it back to health. It’s a daunting task.

On Tuesday, Permo reported an after-tax loss of €999 million. The impairment charge on troubled loans was €891 million and income was down by a quarter to €197 million.

Its net interest margin fell by 20 basis points to 0.72 per cent, which is roughly half the level of where Dr Masding feels it should be going forward for the “good bank” piece of Permo.

Sixteen per cent of its mortgages are in arrears of more than 90 days. Another 5 per cent are behind on their payments for less than three months. The losses on its €16 billion tracker book are “eye- watering”.

You can’t help wondering what possessed Masding, a man of nearly 30 years experience in banking and business, to uproot his family and come to Ireland to run what some believed to be a lost cause.

"Firstly, I took this job because I like a challenge. I like coming to work every day and fixing things. Secondly, banking is consolidating and will continue to do so, so the opportunity for me to get an organisation and put my own stamp on it was one I was looking for.

“Third, everyone was telling me not to do it. There is a bit of a fighter in me. If someone says turn left I turn right. So that sort of drove me to want to do it and I’m really glad I’ve done it. It’s the most fun I’ve ever had in a job and I enjoy it immensely.”

Really?

“Yes. I’m not sure where the point of arrival [he means the stepping-off point] will be, but I’m pretty clear in my own head that if I’m given the space and the time, I can create an asset of value for Ireland.”

Closing the bank was one of the options Masding considered on taking the job before deciding that a good bank/bad bank model was viable.

“It had multi-channel distribution, it had a large customer base and it had a recognised brand. From what I could see it had a stock of good people. You take those four things and you have to believe that somewhere within that is a company with a stable future,” he says.

But he freely admits to being shocked by the way it was being run. How bad was it?

“On a scale of nought to 10? About minus five,” he says without a hint of exaggeration.

Arrears management was probably the “number one” area that needed to be fixed. “An organisation’s leadership team has to understand that arrears management is a tough job.

“So you have to treat those people with respect. You have to give them the right working environment. You have to give them the right tools, the right leadership, the right encouragement, the right investment.

“My team, who are all good people, were stuck in a dark and dank corner of this building without any of the aforementioned. You have to give them the right technology, particularly in a world where you’ve got a large amount of cases. You have to organise them properly and none of that was there.”

Those elements have been addressed. Its asset management unit is now located on one floor of the building occupied by Aviva, close to the Harcourt Street Luas stop.

It’s bright and airy and buzzing with activity. It has a call centre feel about it, with mock Dublin placename plaques – like Dawson, Pembroke and Merrion – suspended from the ceilings.

You’d be forgiven for thinking they were selling pay TV subscriptions rather than shaking a few bob out of customers in arrears.

Strategy and planning

“It’s all about picking the right people and encouraging them,” Masding says.

Not that it’s all a bed or roses. “At least once a week you will have one of the staff who will be in tears because of the nature of the calls. You’ve got to be empathetic; it’s tough there.”

The old Permo got “carried away with sales and marketing” and its attention to arrears was “shameful”, Masding explains. “That’s the reason why we started from scratch.”

Strategy and planning are at the heart of everything that Masding does and believes in. It was a value drummed into him during 20-odd years in Barclays Bank, particularly the three years spent working in the inner sanctum with its former chief executive, Kerry-born Matt Barrett.

Masding’s view is that if you plan properly, hire the right people and give them the proper tools for the job, everything else will fall into place.

He has devised the “bank plus two” strategy. This involves three discrete business unit – a revitalised Permanent TSB retail bank, an asset management unit to deal with its low-yielding and distressed Irish loan book, and Capital Home Loans Ltd, comprising UK buy-to-let loans.

Tracker mortgages fall under the wing of the asset-management unit. These are all lossmaking, although Masding is coy about the figure.

“I’d rather not go into the numbers. It’s a significant amount of money and a significant amount of value destruction for the taxpayer. That is an issue for us to manage. But I don’t see what the alternative is other than us managing them.”

What about placing the tracker book with, say, the National Asset Management Agency?

“If the system could provide a solution, that would be fantastic. I’m sure there are dialogues going on in the background but, to be honest, that would only be a diversion of my time because I can’t control it.”

Then there is the debate about debt forgiveness. The Central Bank and Government recently published targets for Permo and other banks to reach this year in terms of providing proposals to customers who are in arrears. They want the banks to do more to tackle the problem of bad loans.

Discussions are also taking place under the auspices of the Central Bank between the banks, credit unions and credit card groups about designing a protocol for how secured and unsecured debt is treated when people are in arrears.

Offered a write-down

Separately, various politicians and interest groups are pressing hard for debt write-offs for distressed borrowers as a permanent solution to this seemingly intractable problem.

Cut out the cancer and the patient can be cured is the narrative and sure is that not why the banks were given their bailout funds in the first place?

“It’s an interesting perspective,” Masding says. “I have a fiduciary duty to the taxpayer to protect their capital. Judicious use of capital does not mean debt forgiveness.

“My definition of debt forgiveness is the unilateral forgiveness of debt without going through a mortgage [resolution] process. Unless the rules of the game change, that’s not going to happen.”

Masding adds that this does not mean no Permo customers will be offered a writedown.

“Each case is different and if, at any point in time, part of a sustainable treatment for a customer is selectively writing down some capital, that is normal banking practice. I’m not arguing with the narrative that says it is normal that capital is used for unexpected losses.”

So some customers will get a writedown?

“I am saying that normal banking practice is that you engage in a conversation with a customer, you put them on a treatment and if, at some point, over time there’s an element of that capital that is irrecoverable that is what the capital base [of the bank] is for. I would expect to sit here as I have done in every job in the past 20 years with cases where we will write off capital.

“Depending on the customer’s circumstance, it could be that we will have to write off, but I think my job is absolutely to minimise those situations. My job is to protect taxpayer’s funds and to do everything I possibly can to put a customer on a long-term treatment that’s sustainable.”

It’s not all about arrears at Permo. Masding says it has about €350 million to give out in new mortgages this year, which would be about four times the level of 2012.

Restructuring plan

“It’s not a hard and fast target because it’s a disaster when bankers chase volume. That’s one of Ireland's big lessons of the past 10 years.”

Permo launched a deposit product for over-55s that he says is “going well” and it has plans to offer a free current account to customers from April 2nd, providing they are willing to put in €1,500 a month and do their transactions predominantly online.

The bank recently submitted its restructuring plan to the European Commission and expects to get the green light.

“The play we’ve made is as a challenger bank,” he says, “keeping them [AIB and Bank of Ireland] on their toes.”

He can’t resist the odd dig at his predecessors at the bank, who led it down the path to ruin, particularly when it is pointed out that Permo previously made a big play around free current accounts.

“We were a retailer selling stuff off the shelf at a discount on a ‘no return’ basis, that’s how I would describe it.”

Born in Newport, Masding spent his teen years in Manchester before joining Barclays out of school at 18.

“You got half an afternoon off on a Thursday if you played sport. It was old- fashioned banking.”

He was “plucked” from front-line branch duty in 1990 and put on a three- year graduate scheme in London. He then got a “broadening attachment” with Barclays in Greece for four and a half years.

He moved up the corporate ladder on his return Greece, becoming a senior corporate director for three years. Masding completed an MBA on distance learning while working at Barclays.

The Welshman spent a year working for the Blair government in 1999, on the strategy and planning team in the Cabinet office dealing with civil service reward. This was followed by three years as director of strategy and planning at Barclays.

About 2007, Masding began to get an itch to work outside the bank and took up a role with entrepreneur Andrew Turner at an independent finance broker and lender called Central Trust.

In 2009, he left that business and became self-employed, filling various roles and loving the freedom. “I didn’t wear a suit for two years; it was great.”

Did he need the financial security of the Permo job – he earned €407,000 in 2012 – after a couple of years as a gun for hire? “No. I was charging a nice day rate. I had bonuses actually. There’s a strange concept.”

Do you expect to earn a bonus at Permo?

“No, no. I have zero expectation of that. I’m very well paid. I knew exactly what the rules of the game were. I had lots of offers to do things. Some of the jobs involved big, big money. But I didn’t want to do them. A lot of them were reporting to someone else.

“I would be unmanageable. I would be a complete nightmare because I would be thinking: ‘You’re crap. I could do this better than you’.”

How long will you be here?

“I’m going to fix it . . . so it could be 175 years. No . . . I’m hoping four or five years. If, after that time, I’ve kept 800 people in a job and created a good bank, then that would be a massive success.”

Business sense

Will the taxpayer get its net €2.7 billion in bailout funds back?

“Probably the real question is will they get all their money back,” he says. “I think that’s unlikely. The prize is to build a really well-governed, well-managed Irish retail bank that’s competing in the market and does what it say on the tin.

“The problem with Permanent TSB [previously] is that it got carried away with itself. It suddenly thought we can beat BoI and we can beat AIB. Well, it took Barclays 300 f**king years before it got to a place where it was a global financial services institution.

“AIB and BoI are universal banks. Did we really think we could compete with those guys in a few years. Off their f**king heads, sorry, forgive my French. Anyone with any business sense will tell you that, over time, focus is what will deliver sustainable shareholder value.

“So we will put good products on the shelf. We’ll have good people serving customers with commitment and passion. We’ll lend money to people who want it and who can pay it back, and we will make a nice shareholder return. It will be retail banking done well.”

Thank you doctor.