Red ink for Permanent TSB despite underlying profit

In keeping with the other Irish banks, Permanent TSB’s half-year results yesterday showed improving trends on a number of fronts.

Income was up, payroll costs were down, its net interest margin improved, a lower impairment charge (€149 million versus €430 million a year earlier) was recorded, and it reported a 14 per cent decline in the number of customers in mortgage arrears when compared with the end of 2013.

However, unlike AIB, Bank of Ireland and Ulster Bank, who were all able to report a clean return to profitability, Permanent is still operating in the red.

Both the bank and Minister for Finance Michael Noonan were keen to highlight that the group made an underlying profit of €4 million in the six months to the end of June but this was before non-recurring items and impairment charges.

Once these were factored into the calculations it had recorded a loss of €171 million. Add a tax charge of €29 million and the group’s total loss for the six-month period was a hefty €200 million.

It's a long way from the €1.5 billion deficit recorded in full year 2011 and the near €1 billion losses in each of the two following years. But it is "still heavily loss- making", according to chief executive Jeremy Masding yesterday. A return to profit for the group as a whole isn't expected until 2017.

Material uncertainties Permanent also continues to await approval from the European Commission for its restructuring plan, which was first submitted in 2012. Masding expects this in due course but it was cited in the bank's 70- page interim report as one of "two material uncertainties facing the group" – the other being its reliance on European Central Bank system funding – that cast doubt on its ability to continue as a going concern. While this is a technical warning to comply with accounting rules, it also highlights the fact that Permanent is not yet able to stand on its own two feet. Without the State standing behind it, it would go the way of the dinosaur.

Masding deserves credit for Permanent's improvements. When he joined the bank in January 2012 there was considerable doubt as to whether Permanent had a viable future when decoupled from Irish Life, and, to all intents and purposes, it was closed to new business.

He spent his first agm fending off shareholder anger over its standard variable mortgage rate, which was significantly higher than those of its competitors at that time, while the backlog of mortgage arrears mounted by the day.

On his watch Permanent has put in place perhaps the most impressive arrears collections unit in the market. While this problem is far from resolved you get the impression it is well in hand. About 24,000 sustainable solutions have been agreed with its arrears customers and the redefault rate – those who default on the revised terms of their mortgages – is just 8 per cent.

New mortgages Permanent is also back lending in the market at competitive rates. It did €180 million in new mortgages in the first six months, which was 362 per cent up on the previous year. This gave it share of 13 per cent of home loans – well off its pre-bust peak when it was the biggest mortgage provider in Ireland but respectable nonetheless.

Continuing a positive recent trend, retail deposits increased by €600 million in the first six months, which has helped the bank to reduce its ECB funding from just under 20 per cent of the total to 16.9 per cent.

With Irish bond yields at record lows and the perception of the country having changed dramatically since we exited the troika programme in December, securing funding no longer seems to be a problem for the group.

There are still numerous legacy issues to be tidied up. One of them is the funding drag caused by its €12.9 billion tracker mortgage book in Ireland. In March, Masding put it at €75 million a year.

With ECB interest rates at a record low, this is a substantial drain on the business. Masding said trackers would continue to be a drag on profits for “years to come” but “it’s one we can handle and one we will [handle]”. Time will tell.

Bailout exit Masding also said he wanted to achieve a “successful exit” for the State from its investment in the bank at a “fair price”.

The timing would be up to Noonan and his officials but 2016 and 2017 would be about “creating options for him for an exit”, Masding added.

He reiterated that it remains “unlikely” the State would get back its full €2.7 billion in bailout funds, which date back to 2011.

The price “will be what it will be” but the scale of the proceeds will increase as the performance of the bank continues to improve, he added.

Masding was right when he said the interim results were a “major step in the right direction” but there’s a long road still to be travelled for Permanent to complete its journey from being a “viable bank to a valuable bank”.

Given the fragile state that the bank was in two years ago we should probably be grateful for that much.