Eamonn Crowley recalled this week how his parents brought him to their local Irish Permanent Building Society branch in Dundrum, south Dublin in 1980 to open his first bank account.
Installed on Monday as the new chief executive of the society's successor, Permanent TSB (PTSB), the now 51-year-old showed that he hasn't lost all traces of schoolboy optimism.
“I want to foster a positive consumer-focused culture within the bank, as I strongly believe that maximising returns for our customers will lead to maximising return for shareholders over the long term,” he told reporters on a conference call after his appointment was announced. “I will be matching the talk with action.”
But having joined the bank three years ago as chief financial officer, he’s painfully aware, too, of the challenges.
PTSB faces an uphill battle, along with the wider banking sector, in rebuilding customer trust more than a decade after the great financial crash – and five years after it became the first lender to be exposed for its role in the now industry-wide tracker mortgage scandal.
More worryingly for investors, the smallest of the three surviving bailed-out Irish banks has also been dogged consistently by the lowest level of profitability – measured by return on equity – in the sector.
This is the result of the bank’s almost singular focus on mortgages, more than half of which are low-yielding loans that track the European Central Bank’s (ECB) main rate; the small size of its balance sheet following 12 years of shrinkage; comparatively higher regulatory and running costs; and lower reliance on fee income than rivals.
The Covid-19 economic shock, which has resulted in 10,000 PTSB mortgage holders availing of temporary payment breaks and a slump in mortgage activity, has thrown the bank’s issues into sharper focus. It has also fuelled speculation in the market that it may ultimately need to be taken over by a larger player.
"In the near term, the new CEO's focus will be on dealing with the impact of Covid-19 on non-performing loans and new lending," said Eamonn Hughes, an analyst with Goodbody Stockbrokers. "But when you look out over the next few years, PTSB is going to emerge from the crisis with a low return on equity of 2 or 3 per cent, which is going to keep investors focused on possible consolidation."
PTSB warned in a trading update in the middle of last month that its new lending volumes may slump by as much as 50 per cent this year from the €1.7 billion of business written in 2019, as households fret about their finances and housebuilding output drops.
The bank also expects to take a €50 million bad loans charge in the first half of this year as the coronavirus crisis leads to a fresh spike in soured loans.
While the nature of temporary relief agreed by Irish lenders in March means that borrowers affected by the economic shock can freeze payments for up to six months without affecting their credit rating, banks are beginning to assess which loans will not return to full payments afterwards. Many will need further forbearance or restructuring, at a cost to banks. Problems that are ignored – either by lenders or borrowers – will end up in arrears.
Hughes estimated in a recent report that PTSB will have to deal with €300 million of loan impairment charges over the course of this year and next, sending the bank back into loss-making territory.
This is well off the €1.8 billion of loan losses that Hughes expects larger rivals AIB and Bank of Ireland each to stomach. However, PTSB will still only be generating returns on equity of about 2 per cent, the lowest in the sector, by 2023 – posing "further questions around the business model", according to the analyst.
A return on equity (RoE) of about 8 per cent is seen by analysts and investors as the minimum to demonstrate that a bank has a robust business.
For all its issues, the bank Crowley has inherited is far from the existential mess that greeted his predecessor, Welsh banker Jeremy Masding, when he took over the helm in 2012.
Against all the odds, Masding convinced the Government and the European Commission that PTSB had a future after its €4 billion taxpayer rescue during the financial crisis. He returned the bank to the main Dublin stock market in 2015 after failing European Union stress tests, and completed the sale of its €6.5 billion UK loan book in 2016 after the Brexit vote.
The group has also returned €1.8 billion of its bailout to taxpayers, including proceeds from the sale of its former life assurance business, Irish Life, the redemption of bailout bonds and the sale of shares.
Adding in guarantee fees, interest on the bailout bonds, known as contingent convertible notes, and levies brings the total amount handed over to the State to more than €2.8 billion.
In addition, the bank sold €3.9 billion of non-performing loans (NPLs) in the past two years without blowing a hole in the group’s balance sheet, reducing its NPLs ratio from a ticking time bomb level of 28 per cent of loans to about 6 per cent.
“The NPLs disposals looked good at the time, but they are even more important now in the context of Covid-19 and a weaker domestic economy,” said an executive at a rival bank, who declined to be named. “Trying to deal with a large rump of legacy bad loans in this environment would be incredibly challenging.”
AIB, Bank of Ireland and Ulster Bank have so far set aside over €500 million between them to cover initial expectations of a surge in bad debt, mainly in their small- to medium-sized enterprise (SME) and corporate portfolios. Losses in mortgage books will take longer to materialise, according to bankers and analysts.
Irish banking stocks had already been out of favour with international investors before the Covid-19 crisis. While the wider European sector was reeling from the impact of ultra-low central bank and market interest rates on lending margins, the Republic's lenders were also affected by muted lending amid Central Bank mortgage rules and a dysfunctional housing market, as well as a reluctance among SMEs to take on new credit as they fretted about Brexit.
Four of the five Irish retail banks were working on plans to cut costs and jobs to help shore up their earnings before Covid-19 struck, including PTSB.
The Irish Times reported last October the bank was working on a restructuring plan that was expected to involve the closure of about a fifth of its 77 branches and the elimination of 10-15 per cent of its workforce. That equated to between 240 and 360 positions.
The Covid-19 crisis may impact the scale and pace of any restructuring. Meanwhile, Crowley is said to coming to the top job with a strong view of the value of the bank’s branch footprint.
Elsewhere, AIB chief executive Colin Hunt has stalled voluntary redundancies at his bank as a result of the pandemic, with 350 positions he had planned to cull in the distressed-debt unit now likely to be retained as the sector eyes an increase in problem loans.
Hunt said last month that he still plans to achieve a target of eliminating 1,500 jobs by the end of 2022.
Answering questions from reporters this week, Crowley said: “Costs will continue to be on the agenda, but not a radical plan with regard to cost reduction.”
He highlighted that the bank has secured €40 million of savings over the past two years and reinvested these into a €100 million IT investment plan. The pot pales in comparison to Bank of Ireland’s current €1.15 billion digital overhaul programme. AIB has spent more than €1.3 billion on its systems in the past five years as part of ongoing investment.
Clearly tired of mergers and acquisitions (M&A) chatter that has long surrounded PTSB, Masding appealed last July for time for the bank to give its “best shot” at increasing earnings and value, before facing possible talks with his board and the Government about taking part in an industry merger.
“The sceptics would say: ‘Even doing your best might not get there.’ That might be true. But what I do know is that we’ve not maxed out yet,” he said at the time.
Crowley, who joined PTSB in 2017 from AIB’s former Polish subsidiary Bank Zachodni WBK (now Bank Santander Poland), outlined on Monday two areas where he thought the bank could do better.
Firstly, while PTSB rebuilt its share of new lending in the Republic’s mortgage market to 15.5 per cent last year from a low of 2 per cent at the height of the financial crisis, the new chief executive said he planned to redouble the bank’s efforts at cracking the SME market.
PTSB’s SME lending amounted to €47 million in 2019, having more than doubled off a very low base in 2018.
Secondly, he signalled he would be focusing on increasing the bank’s fee income. He highlighted that the bank generates only 10 per cent of its income from fees, compared with 30 per cent at Bank of Ireland and AIB and 20 per cent at Ulster Bank.
"The opportunity to improve fee income and capture a greater share of SME and non-mortgage retail lending are supportive drivers, but costs and mortgage lending will continue to underpin the financial outlook," said Stephen Lyons, an analyst with Davy.
The prospects of PTSB being sold off or merging with a rival in the near term are slim as other banks focus on preserving capital during the Covid-19 crisis, according to industry observers.
Ulster Bank and KBC Bank Ireland have been long speculated as potential partners. And Hughes highlighted in his recent report that Bank of Ireland shouldn't be ruled out if it can deliver on its IT programme.
But Daragh Quin, a Madrid-based analyst with investment bank Keefe, Bruyette & Woods (KBW), said there is little upside for the Government, which owns 75 per cent of PTSB, pushing the bank into a merger.
“Pressure usually comes from shareholders for a bank to maybe look to be part of a larger franchise if it is delivering low levels returns. But the main shareholder in PTSB is the Government. And is having a return on equity of 2-3 per cent a problem that the Government needs to have solved? No,” he said.
“A sale of the business would have political implications in terms of the price achieved and also potentially reducing competition when the Government is trying to increase it.”
While regulators in the European Central Bank have been pressing for consolidation among banks in the euro zone to help secure costs savings, boost profits and reduce systemic risk in the financial system, Quin said that German banks "seem to manage ok" with returns among the lowest in Europe.
“PTSB, because of its small size, isn’t itself a systemic risk. Indeed, its profitability would be higher if it didn’t have to hold such a high capital ratio [for regulators]. I don’t think regulators will force a deal in the short term,” he said.
While Crowley acknowledged this week that PTSB has a “slightly higher mountain to climb” in dealing with the challenges facing banks, he didn’t give the impression he would surrender its independence too easily.
“I’ve spent a long time in retail banking, both in Ireland and overseas,” he said. “I’ve seen recessions and I’ve seen recoveries. I think Permanent TSB is in a really good position to support this recovery and our customers – and attract new customers to the bank.”