PTSB has good reason to avoid negative rate charges

Permanent TSB is alone among the three continuing Irish banks in not passing on to customers the negative interest rates it is being charged for excess deposits placed with the European Central Bank (ECB). It has more than three billion reasons not to join its peers any time soon.

The bank confirmed last week that it plans to buy €7.6 billion of loans from Ulster Bank, as the latter looks to withdraw from the market. Of course, the figure will probably be lower by the time the deal actually goes through in the middle of next year as Ulster's borrowers continue to pay back loans.

Permanent TSB (PTSB), like the other Irish banks, is sitting on billions of euro of excess deposits – not helped by the fact that households have been saving like crazy over the past locked-down year. The ECB has been charging negative rates on excess liquidity placed with it since 2014 in an effort to get banks to lend more and stimulate the economy – albeit with limited success. Its rate currently stands at minus 0.5 per cent.

AIB and Bank of Ireland have been gradually lowering the threshold at which they pass on negative rates in recent years. They're drawing a line, for the moment at least, at the €1 million mark.

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PTSB’s €14.5 billion of deposits currently exceed the size of the bank’s loan book by more than €4 billion, according to its first-half report, published on Wednesday. This gives it a loan-to-deposit rate of 77 per cent (the reverse of situation it was in before the financial crisis, when it was overly reliant on wholesale funding).

These surplus funds give PTSB a good starting point as it pulls together money to pay for the Ulster Bank loans. The bank will be hoping to bridge much of the remaining €3 billion-plus gap by luring deposits from Ulster Bank and KBC Bank Ireland, which is also in retreat.

Many of these will come naturally as PTSB takes over 25 Ulster Bank branches. And, of course, PTSB also has plenty of options to raise money in the debt markets. But continuing to resist the urge to charge negative rates could pay dividends.