PTSB set for fastest income growth among European banks this year, says top US investment house

Permanent TSB (PTSB) is poised to see its total income surge by 83 per cent this year, making it the fastest-growing bank in Europe, according to US investment bank BofA Securities.

This should pave the way for financial regulators to next year lift a long-standing ban on PTSB paying dividends, which would allow the Irish Government and UK banking giant NatWest to potentially sell down part of their respective stakes in the company, BofA Securities analyst Alastair Ryan said in report on the lender, published on Wednesday.

Mr Ryan estimates that PTSB’s transformative acquisition of €6.8 billion of mortgages and business loans from Ulster Bank, growing its portfolio by 50 per cent, and the benefits from rising interest rates will push the group’s total operating income to €669 million this year from €365 million in 2022.

Ulster Bank’s parent, NatWest, took a 16.7 per cent stake in PTSB late last year as part payment for the loans. This resulted in the Irish State’s crisis-era interest being diluted to 62.4 per cent from 75 per cent.

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Non-performing loans

While AIB resumed paying dividends in 2017 for the first time since the financial crash and Bank of Ireland followed suit in 2018, PTSB continues to be prohibited by regulators at the European Central Bank (ECB) and Central Bank of Ireland from making payments to shareholders, as a result of its recent history of low levels of profitability and high non-performing loans (NPLs).

“With the group set to be strongly profitable from 2023 and NPLs [falling to] 3 per cent, we believe the dividend stop should be lifted,” Mr Ryan said. “Clarity on this will be important for the potential placement of shares by NatWest and/or the State.”

A look ahead to 2023

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The Government has repeatedly said that it does not see itself as a long-term holder of bank shares, even if the focus in recent times has been on selling its remaining Bank of Ireland stock and reducing its stake in AIB. NatWest is also widely seen as a natural seller over the near- to medium-term.

The BofA report highlighted that PTSB’s NPLs have fallen from a quarter of all loans when the bank returned to the main Dublin and London stock markets in 2015 to about 3.4 per cent at the end of last year. This was the result of the bank restructuring problem mortgages and being forced by regulators to sell off some of those loans, as they continued to be technically classified as loans that will never be fully “cured”.

Capital markets

Meanwhile, the bank has transformed its funding model since the financial crash in 2008, when its high reliance on capital markets for funding meant that it had €284 out on loan for every €100 of customer deposits. The loan-to-deposit ratio had fallen to 67 per cent by the end of September, according to its most recent trading statement, prior to the completion of the Ulster Bank deal.

A series of ECB interest rate hikes since July has transformed the prospects of Irish banks, who are more reliant on interest income for earnings than their average European peer. The main earnings boost has come from the ECB moving from charging banks a rate of 0.5 per cent for excess deposits placed with it to paying banks a rate of 2 per cent.

While holders of tracker mortgages have been hit automatically by each ECB increase to its main lending rate — which stands at 2.5 per cent — Irish banks have been behind the curve in passing on increases to other customers.

“We fully expect the banks to raise mortgage rates to a sufficient level in coming months, but homeowners have had a period in which to anticipate price changes,” said Mr Ryan.

The analyst has set a €2.60 price target for PTSB’s shares, which points to about 30 per cent upside from current levels.