Banks may use bond markets to refinance split mortgages

Permanent TSB lobbying ECB to reclassify split mortgages as performing loans

 Permanent TSB has the highest ratio of non-performing loans (NPLs) in Ireland, at 26 per cent. Photograph: Alan Betson

Permanent TSB has the highest ratio of non-performing loans (NPLs) in Ireland, at 26 per cent. Photograph: Alan Betson


Irish banks and firms that have bought non-performing loans in recent years are likely to turn to the bond markets to refinance so-called split mortgages, a key restructuring solution offered to troubled borrowers in the wake of the financial crisis, according to credit ratings firm DBRS.

The Irish Times reported last June that banks were weighing bond sales, known as residential mortgage-backed securitisation (RMBS) deals, to help lower their levels of non-performing loans (NPLs). However, they would have to structure any transactions off-balance sheet to move them off their books.

DBRS’s head of EU structured finance research, Gordon Kerry, said on an online investors presentation on Thursday that portfolios of split mortgages – where interest and principal payments on part of a loan are put off to a future date until the borrower’s circumstances improve – are likely to be brought to the market in future in RMBS deals. There are currently about €3 billion of split mortgages in Ireland, covering owner-occupier and buy-to-let loans.

Under pressure

While Irish banks lowered their NPLs ratios from an average of 26 per cent in 2013 to 12 per cent last year, according to European Commission data, they are under pressure from regulators to reduce the level to the EU norm of 5 per cent.

Split mortgages are considered by the European Central Bank (ECB), which supervises euro zone lenders, to still be non-performing. Permanent TSB, which has the highest NPLs ratio in Ireland, at 26 per cent, said this week that it has been lobbying the ECB for some time to reclassify split mortgages as performing loans, which would enable the bank to retain €900 million of such loans that it currently has for sale.

Bad-loans provisions

Sources said this week that a favoured option allowing the reclassification of the split mortgages would involve the bank technically converting bad-loans provisions taken against the warehoused portion of the loan into a debt write-off for accounting purposes.

This would crystallise a loss on the balance sheet, allowing the bank to draw a line under the debt issue. However, the borrower would still be liable for the warehoused part of the loan.

Another solution would involve PTSB undertaking an off-balance sheet RMBS transaction involving the split loans, the sources said.