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PTSB faces battle to offer mortgages on same footing as larger rivals

Next task will be to reduce capital it holds against new loans

Analysts reckon PTSB may consider offering a dividend in early 2025, on the back of earnings next year. Photograph: Alan Betson/The Irish Times

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Tue Dec 19 2023 - 06:00

The Central Bank of Ireland surprised PTSB investors last week by lifting a long-standing block on dividends at the only Irish bank that has yet to return to payouts following the financial crisis.

Analysts at Davy and Goodbody Stockbrokers reckon PTSB may consider offering a dividend in early 2025, on the back of earnings next year.

The so-called “dividend blocker” had technically been in force since 2016 but effectively in place since the outset of the 2008 crash, as PTSB struggled more than its larger peers to justify its continued existence.

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The turning point for PTSB was its purchase since late last year of €6.75 billion of loans from Ulster Bank, as the latter retreats from the Irish market. It increased the bank’s loan book by about 45 per cent.

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PTSB has also benefited from rising interest rates. But not to the extent of AIB and Bank of Ireland. That’s because the bigger two have about €30 billion of excess cash stored with the Irish central bank, the vast bulk of which is earning 4 per cent following European Central Bank rate hikes since the middle of last year.

PTSB only has about €2.8 billion of deposits with the Irish central bank.

But a bigger issue for PTSB is that it has to set aside much more expensive capital than the other two for new home loans. Every €100 of mortgages the bank issues has a risk weighting of close to 50 per cent, against which it must hold capital. The high risk-weighted assets density is a result of the bank’s experience of the last cycle when 28 per cent of its mortgages were non-performing. The risk weighing on new Bank of Ireland and AIB mortgages is in the 20s.

“The current situation makes little sense in that new mortgages, where there is very little differences in underlying risk due to the Central Bank’s mortgage lending rules, are treated radically different at PTSB,” said Diarmaid Sheridan, an analyst with Davy. “There is a legacy treatment which PTSB will seek to address via risk-weighted model improvements with its regulator.”

The sooner it gets relief, the better — especially when mortgage competition has been hit in recent times by the exits of Ulster Bank and KBC Bank Ireland and retrenchment of non-bank lenders ICS Mortgages and Finance Ireland, as their funding costs soared amid rising rates.

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