Permanent TSB chief executive Jeremy Masding knew the odds were stacked against him from the time the former Barclays banker turned up in Dublin in February 2012 for his first day at the bank's warren-like headquarters on St Stephen's Green.
The first big challenge was to work out if the Republic's one-time biggest mortgage lender, bailed out to the tune of €4 billion during the financial crisis, was even worth saving. Then there was the drawn-out job of trying to convince the European Commission that it actually was – which he managed to do in early 2015.
The problem, however, was that bank – by then almost 100-per cent State owned – had failed European banking stress tests only months earlier, forcing Masding to go out into the market to find stock market investors to buy €500 million of shares in April 2015 to bolster its balance sheet. It was the first post-crisis initial public offering (IPO) of an Irish bank, though it was way behind larger rival AIB in its recovery and that bank would return to the main Dublin and London markets more than two years later.
Brussels’ approval of a restructuring plan for PTSB also came at a price. The bank was ordered to shed €8.4 billion of assets, including its UK mortgage portfolio and Irish commercial property loans.
In fairness to Masding, he managed to complete the sales in late 2016 – ahead of schedule and despite huge scepticism in the market – with the last of the UK loans offloaded just months after the Brexit referendum.
PTSB was alone among the six Irish lenders guaranteed by the State in September 2008 in not transferring toxic commercial property assets to the National Asset Management Agency (Nama) following the crash.
But its own rapid deleveraging left it with non-performing loans (NPLs) equating to 28 per cent of its total portfolio as of the end of 2017 – the highest among Irish banks and more than five times the European Union average.
PTSB prompted public and political uproar when it decided last February to press ahead with the sale of a multibillion-euro portfolio of non-performing mortgages, called Project Glas, making it the first rescued Irish lender to market private home loans.
In an effort to take the political heat out of the sale, Masding pulled €900 million of so-called split mortgages from the deal. These are loans that have been restructured by the bank, where repayments on a portion of the loan are frozen until a future date. Even though borrowers are largely sticking to the new arrangements, they continue to be categorised as NPLs.
PTSB confirmed this week that it has now arranged to refinance the split mortgages and a bunch of other restructured loans, where borrowers are paying part-interest and part-capital, to get them off its balance sheet. It will involve the sale of bonds backed by income from the mortgages to international investors in what is known as a securitisation deal. PTSB will hand over the day-to-day management of the loans to outsourcing firm Pepper Asset Servicing.
Brendan Burgess, of the consumer forum Askaboutmoney. com, has said he would be surprised if Pepper, working on behalf of the bondholders, will be as flexible as PTSB when it comes to the periodic reviews of split-mortgage arrangements.
However, the bondholders will be interested in one thing: regular, long-term income. That differentiates them from the typical so-called vulture funds that have been hoovering up distressed Irish debt in recent years.
The €1.3 billion portfolio is known to be generating cash the equivalent of more than 3 per cent of the assets currently.
Clearly aware of the sensitivities involved in the deal, Masding and Pepper's Irish chief executive, Cormac Ryan, have written to Taoiseach Leo Varadkar and the Oireachtas finance committee to say they're willing to appear before the group of TDs and Senators to discuss the matter. They can expect a proper grilling.
The securitisation deal and Project Glas sale will see PTSB’s NPLs ratio fall below 10 per cent by the end of the year – leapfrogging AIB, which had been well ahead of the game. Masding expects that the ratio will fall naturally by another two percentage points by the end of 2019.
No doubt other Irish banks, still burdened by restructured loans that will continue to be classified as NPLs over the long term, are watching the PTSB transaction carefully.
But while the deals remove a serious threat to PTSB’s viability, they will expose the bank’s real problem in sharp relief. As a small, mortgage lender (albeit one that has managed to reboot its market share for new loans to 14 per cent from a crisis-time low of 2 per cent), PTSB is set to trail the State’s two “pillar banks” in terms of profitability.
Goodbody Stockbrokers analyst Eamonn Hughes reckons it'll be reduced to being a bank with a return on shareholders' equity of just 4 per cent for the foreseeable future. That's half the rate you'd expect for a retail lender – a turn-off for long-term investors and surely a worry for regulators.
Hughes may have moved on Friday to upgrade his stance on PTSB shares to outright “buy”, by virtue of the fact that they had lost more than a fifth of their value over the past eight weeks. But the Government has little chance of selling down its remaining 75 per cent stake in the bank on the stock market any time soon.
But might Masding’s clean-up operation turn it into a takeover target?