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Permanent TSB chief executive Jeremy Masding, who announced on Thursday he plans to quit at some stage next year after eight years at the helm, has some unfinished business to attend to first.
Only three months ago, the longest-standing CEO among Ireland’s banks appealed to investors and followers of the mortgage lender’s struggle to recover from the financial crash for time to give it his “best shot” to prove Permanent TSB (PTSB) has a viable, independent future.
“The sceptics would say: ‘Even doing your best might not get there.’ That might be true,” Masding told reporters at the time. “But what I do know is that we’ve not maxed out yet.”
As banks grapple with a squeeze on earnings from an extended period of record low European Central Bank (ECB) rates and slower-than-expected loan book growth – amid uncertainty over Brexit and the housing market – Masding said that a focus on "efficiency and effectiveness" has become the "key battleground" for the industry.
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Before he departs, Masding plans to unveil the biggest PTSB restructuring plan since the Welshman took an initial swipe at costs shortly after setting foot in the bank’s creaky, rabbit warren-like headquarters on St Stephen’s Green in early 2012, according to sources.
The project, also being worked on by chief financial officer Eamonn Crowley and retail banking director Patrick Farrell, is likely to involve the closure of about 15 of the bank's 77 branches, The Irish Times has learned. Industry sources estimate that between 10 and 15 per cent of its workforce – equating to between 240 and 360 positions – could be eliminated under an overhaul, including staff in PTSB's bad debts unit as its level of non-performing loans (NPLs) continues to shrink.
The bank is also understood to be considering selling off and exiting its head office buildings, where St Vincent’s Hospital was established by the Religious Sisters of Charity in the 1830s before moving out to the Merrion Road in 1970. The bank had been preparing to sell the Georgian properties in 2007 – before the crash – with a price tag of €100 million.
Cost-cutting driuve
PTSB is not alone. Four of the State's five surviving retail banks are working on what's shaping up to be the biggest cost-cutting drive by the industry since the Republic was in the middle of an international bailout programme earlier this decade.
It comes at a time when lenders in Ireland and elsewhere are investing heavily in their information technology (IT) systems. The wider European banking sector has announced plans so far this year to cull more than 50,000 positions.
"With interest rates at current levels, the traditional banking model is extremely challenged, as banks' ability to generate net interest income – their main source of income in Ireland – continues to be under pressure," said Diarmaid Sheridan, an analyst with stockbroker Davy. "As a result, banks are increasingly looking to areas within their control to offset this pressure – naturally cost bases are one of the primary areas.
“We have seen increased IT investment leading to higher levels of automation, which, in time, should result in lower costs,” Sheridan added. “In addition, certain areas dealing with legacies, such as loan work-out units and the tracker mortgage programmes, will begin to wind-down which should also bring lower costs in time.”
The interest-rate outlook, of course, reflects a bigger problem for the banking industry: the fact that the euro zone economy, and inflation, remain sluggish more than a decade after the financial crisis.
Slowing global growth meant that outgoing ECB president Mario Draghi had to double down and announce a further easing of monetary policy last month – including a rebooting of its quantitative easing (QE) bond-buying programme, and pushing official deposit rates deeper into negative territory – even before he got a chance to start unwinding his crisis-era stimulus programme.
The combined market value of AIB, Bank of Ireland and PTSB has fallen by almost 30 per cent in the past 12 months to €13.4 billion, underperforming the wider European sector. The outlook for the industry in Ireland remains particularly tied to the fallout from the UK's withdrawal from the EU.
Banking chiefs have spoken for at least a year of Brexit stifling demand for new debt among small businesses as they put off investment, while a slowing housing market has also curtailed growth in their mortgage books. Meanwhile, nervous households are increasingly stashing away money in banks, who are suffering excess deposits at a time when the ECB is charging them a negative rate of 0.5 per cent for holding surplus funds with it.
The depressed state of bank shares prompted the State’s financial watchdog, the comptroller and auditor general Séamus McCarthy, to conclude in a report published last month that the almost €30 billion that taxpayers pumped into the three banks during the crisis is unlikely to be recovered in full.
Workforce
The chief executives of AIB and Ulster Bank, a unit of Royal Bank of Scotland, have spoken in the past month of their plans for a fresh drive to rein in employee wage bills, while Bank of Ireland has long signalled that its workforce will be smaller by the time its chief executive, Francesca McDonagh, reaches the end of a strategic plan out to the end of 2021.
It follows a 45 per cent fall in staff numbers across the five main banks to 26,344 since the 2008 crash, as their combined loan books shrank by more than 50 per cent with the sale of unwanted and problem assets and borrowers repaid loans at a faster rate than taking on new debt.
As they prepare to take another red pen at costs, the banks face trade union opposition.
"The banks have been drip feeding information and commentary about low interest rates, the burden of regulation, cost challenges and further headcount reductions in recent weeks to condition consumers and staff to a further round of reduced services and rationalisation," said Gareth Murphy, head of industrial relations and campaigns at the Financial Services Union (FSU).
“We are commencing a round of engagements with the banks to ensure that job security, decent remuneration and investment in the future skills of the workforce are given the same priority as any proposed restructuring plans.”
Bank of Ireland was the first to signal a fresh wave of job cuts in June 2018 when McDonagh, just eight months in the job at the time, outlined a three-year plan to cut expenses, grow the loan book, and invest €1.4 billion on overhauling the bank’s IT systems and restructuring.
The key target is to boost return on shareholders’ equity in the bank, a key measure of profitability, to more than 10 per cent from a figure of less than 7 per cent when McDonagh took over. While the bank has refused to be drawn on how many jobs would be lost as a result, analysts estimated at the time that it could shed more than 2,000 of its 10,600 positions.
It’s not just staff jobs that are being targeted. Last year saw the bank shave €51 million off its annual bill for procurement, professional fees and contracts, according to a spokesman. Further penny-pinching alongside climate concerns also resulted in people in the organisation taking 10,000 fewer taxi trips and 3,000 fewer flights. McDonagh also got rid of one of the organisation’s 10 staff layers; she plans to get it down to seven by 2021.
Still, McDonagh signalled in July that deeper cost cutting will be in store as uncertainty over Brexit and lower-for-longer ECB rates are threatening her ability to deliver on her ambitious loan and income growth targets.
Interest rates
Elsewhere, Ulster Bank's chief executive in the Republic, Jane Howard, told The Irish Times in an interview late last month as she marked a year in the job, that the UK-owned bank is planning a new round of job cuts to rein in costs.
“I think we all thought that, by now, we were going to be in a position where interest rates were rising. But, from the latest coming out of the ECB, it looks like it could be four years,” Howard said. “It is going to be a challenge to generate new income. Therefore, the lever we’re going to have to pull is cost.”
Ulster Bank, which needed a £15 billion (€17.4 billion) parental bailout from Royal Bank of Scotland (RBS) during the financial crisis, was the first Irish bank to unveil job cuts as a result of the crash.
AIB's new chief executive Colin Hunt also signalled earlier this month that he expected to cut 1,000 jobs from its almost 10,000-strong workforce by the end of 2022.
“Based on our current suite of products and services, we will be a somewhat smaller organisation at the end of 2022 than we are at the end of 2019, I think,” Hunt, who took over as CEO in March, said in an interview.
Having spent €1.09 billion over the past four years on IT and other projects to drive “efficiencies” and “productivity”, and pushing almost 1.4 million customers online and onto mobile apps to carry out their banking, the 71 per cent State-owned bank is looking for results on its bottom line.
As things stand, the consensus view among analysts is that AIB’s net profit will contract by 30 per cent to about €760 million this year, dragged down by a €131 million charge taken in the first half to deal with “legacy issues”, including money set aside to cover a likely Central Bank fine over its role in the Republic’s tracker-mortgage scandal.
The bank – currently in the middle of a hiring freeze – looked for 200 people to put their names forward for voluntary redundancies by the middle of this month across its problem loans division as well as its mortgages and consumer credit businesses. Staff taking up the offer will exit just before Christmas.
Goodbody Stockbrokers analyst Eamonn Hughes estimates that every 100 employees that are cut off the payroll have the potential to reduce AIB's costs by about €8.5 million.
Back at 75 per cent taxpayer-owned PTSB – whose all-important return on equity ratio is estimated for this year at a pitiful 2 per cent, compared to a figure of about 10 per cent that investors and funders expect from a robust bank – the restructuring plan in the works remains under wraps.
“Cost management remains a high priority for the bank and any future cost reduction is a further evolution of what we have already undertaken in recent years,” a spokeswoman said.
“Given the lower-for-longer interest rate environment, capital requirements and digital competition, we will continue to review and evolve our operating model to ensure we remain competitive in the market.”
As Masding vies to leave PTSB with a fighting chance of an independent future, his plan may be its last stand.
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