Fifteen years after bailout, taxpayers now €800m under water on surviving Irish banks

PTSB needs relief on the cost of writing mortgages to be able to compete with larger rivals and make good on repaying its bailout

Fifteen years ago this month, stunned and angry shareholders in Bank of Ireland gathered in the Savoy cinema in Dublin city centre for an extraordinary general meeting to capitulate to the first crisis-era bailout of an Irish bank that remains with us today.

Taxpayers would end up pumping €4.7 billion into the lender over the following two years.

By the time the State sold its final shares 18 months ago, Bank of Ireland had returned €6.7 billion in cash to taxpayers, including money received from the sale of bailout bonds, preference stock, interest, dividends and guarantee fees collected following the crash.

It may end up needing the €2 billion surplus to recoup the entire €29.5 billion rescue bill of the three surviving banks as the Government remains under water on the money spent rescuing AIB and PTSB.


We’re talking, of course, about recovery on a strict cash-in, cash-out basis. Let’s not even think about interest paid on money borrowed to save the banks, the “opportunity cost” to the State’s pension reserve fund (now the Ireland Strategic Investment Fund) investing in ailing banks rather than putting cash to work elsewhere — or, indeed, what inflation has done to the time value of money.

AIB’s €20.8 billion bailout, lest we forget, is the largest of the Irish banks that have managed to stay in business.

The bank this week accompanied a record €2.06 billion profit by saying it plans to return €1.7 billion of surplus cash to shareholders. Some €1.3 billion of this is on the way to the State through a €1 billion share buyback and almost €300 million of dividends on its remaining 39.98 per cent stake.

By the time the dividends are paid out, the Government will have clawed back €14.1 billion from the bank.

The remaining stake is worth €4.64 billion at present, meaning the State is sitting on a €2.06 billion paper shortfall.

The three surviving banks reported over the past two weeks a combined 65 per cent surge in net interest income last year to €8.14 billion. This was turbocharged as they carved up loans of exiting banks Ulster Bank and KBC Bank Ireland and as European Central Bank (ECB) rate hikes yielded billions on surplus deposits parked with the Central Bank of Ireland even as lenders held back on passing on the full extent of official rate increases to mortgage customers and savers.

However, the trio have guided that net interest income will decline by an aggregate 5 per cent this year. Bank of Ireland and AIB have each factored in the ECB cutting its deposit rate by 1.25 percentage points to 2.75 per cent by the end of 2024 as inflation continues to ease (this is more than the four quarter-point cuts that are being priced in short-term debt markets).

There are other moving factors at play, such as mortgage holders that fixed rates before the spike rolling off on to higher rates, and more customers moving cash from on-demand accounts to higher-yielding savings products.

However, the big price driver of AIB shares remains the amount of excess capital the bank is generating. Davy analyst Diarmaid Sheridan now reckons it will have about €5 billion to spend on dividends and buybacks over the next three years.

Barclays analyst Grace Dargan said future distributions are “key to the investment case” for AIB.

“Key is the path of distributions from here,” she said in a report this week. “The size of the €1 billion buyback announced demonstrates the ability of AIB to distribute surplus capital, including obtaining regulatory approvals.”

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Minister for Finance Michael McGrath will be hoping he can continue to sell shares into a rising share price as investors come to appreciate the capital returns story more. It is conceivable the stake could be down to about 20 per cent by the end of the year (even if that heaps pressure on McGrath to lift an executive pay cap at the bank in what is effectively an election year).

AIB’s shares are up 14 per cent so far this year, and pushed this week through is 2017 initial public price of €4.40 for the first time since late 2018.

Meanwhile, the Government has recovered €2.8 billion of PTSB’s €4 billion bill, almost half of which was generated by the sale of the bank’s former sister company Irish Life to Canada’s Great-West Lifeco more than a decade ago.

The remaining 57.4 per cent taxpayer stake is currently worth €444 million, leaving a €756 million paper deficit.

The surplus cash return from Bank of Ireland cuts the overall shortfall for the three banks to a little over €800 million currently.

PTSB’s shares, however, have been in reverse for the past year — having fallen 47 per cent. The group may have been transformed by the purchase of €6.25 billion of mortgage and small business loans from Ulster Bank in the past two years, increasing its loan book by 50 per cent.

But the big concern surrounding PTSB is the cost of writing mortgages — still, by far, its main line of business. Every €100 of mortgages the bank issues has a risk weighting of over 40 per cent, against which it must hold expensive capital. The high risk-weighted assets (RWA) density results from 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 unlevel playing field contributing to PTSB’s market share for new mortgages sliding to 15 per cent in the final three months of last year from 23 per cent for the first half — affecting its ability to compete against the big two, who also benefited from nonbank lenders essentially being squeezed temporarily out of the market.

PTSB chief executive Eamonn Crowley’s team is working with advisers on a plan to overhaul its internal loan risk model. It will take time. The hope is that it will get some sort of relief from regulators by the end of next year.

It should help PTSB’s case that 70 per cent of the bank’s mortgages have been issued since strict central bank lending rules were introduced nine years ago. Banks have also weathered the pandemic and cost-of-living crisis (so far at least) without a spike in defaults. At a results briefing on Thursday, Crowley said PTSB had a “safe balance sheet”.

For now, investors are not prepared to give PTSB the benefit of the doubt.

But the outcome of the RWA review will be key to the bank’s ability to compete with its bigger peers – and make good on paying back its bailout.