PTSB plays down Ulster Bank talk as it sells €1.4bn of loans

Buyer of the mortgages, Citigroup, will refinance the buy-to-let loans on bond market

Permanent TSB chief executive Eamonn Crowley has dampened speculation it could emerge as a "white knight" merger partner for Ulster Bank in the Republic.

His comments came as PTSB announced the sale of a €1.4 billion pool of boom-time buy-to-let mortgages where borrowers are only required to make interest payments until the loans mature.

“We watch Ulster Bank with interest,” Mr Crowley said on Tuesday, before clarifying that PTSB’s interest was as an industry player and observer, rather than as a potential buyer of Ulster Bank assets.

“It’s completely hypothetical at the moment. We’re focused on executing our strategy. That’s where our focus is – and nowhere else.”

Mr Crowley noted that PTSB had long been the subject of industry mergers and acquisitions talk. However, an Irish Times report last month that Ulster Bank’s parent, NatWest, was actively considering winding down the Irish unit as part of a strategic review that was also looking at potential mergers and acquisitions, prompted analysts to reassess the potential for PTSB tie-up.

Deutsche Bank analysts said last week that a merger between Ulster Bank and PTSB could result in a 59 per cent jump in the pretax profits of a combined entity if overall costs were cut by 10 per cent.

However, the high capital reserves banks must hold mean that the return on shareholders’ invested equity – a key measure of a bank’s profitability – would be only 3 per cent, they said.

Bank investors typically see a return on equity of 8-10 per cent as a sign of a healthy company.

Sale of mortgages

PTSB announced on Tuesday that it was selling a pool of interest-only buy-to-let mortgages with a gross value of €1.4 billion to US banking giant Citigroup, with the loans set to be refinanced on international bond markets.

The deal involves 3,400 borrowers and the loans have an average balance of €375,000. They are classified as performing loans with an average remaining term of 10 years. None of the loans was subject to payment breaks during the Covid-19 pandemic, the lender said.

PTSB will receive the €1.2 billion net value of the portfolio from Citigroup’s Citibank NA London for the loans, before the US bank sells bonds against them to investors in a transaction known as securitisation.

The deal marks the first loan sale by an Irish retail lender since the onset of the coronavirus crisis. Bank of Ireland decided at the height of the pandemic earlier this year to postpone a securitisation deal that would shift hundreds of millions of euro in non-performing mortgages from its balance sheet. AIB also pulled a planned sale of problem home loans.

PTSB signalled in February that it was assessing risks associated with thousands of buy-to-let mortgages, amounting to €2.5 billion, that were handed out before the crash and were issued on interest-only terms until the loans matured.

The bank said at the time that it was engaging with customers to work out “credible” principal repayment plans in order to estimate the long-term health of this portfolio. The bank cannot change the conditions of the loans as long as borrowers are meeting their contracted terms.

The terms of individual loans involved in the sale are unaffected by the transaction. Loan-servicing firm Pepper will ultimately manage the loans on a day-to-day basis on behalf of bond investors.

The disposal will also boost PTSB’s capital reserves but will result in its ratio of non-performing loans rising to 7.7 per cent from 7 per cent. However, it will effectively release €200 million of expensive capital tied against the portfolio.

Capital ratio

Mr Crowley noted the amount of capital PTSB had to hold against loans in the portfolio was twice as much as the bank’s typical mortgage loans.

“This transaction will increase the bank’s transitional total capital ratio by 2.1 per cent, strengthen the balance sheet and provide us with resources to compete in our core markets of personal mortgages, personal lending and SME lending,” said Mr Crowley.

“All applicable terms and conditions continue to apply, meaning that customers will be afforded the same consumer protections upon completion of the transfer. Like Permanent TSB, Pepper is regulated by the Central Bank of Ireland and is required to comply with consumer protection legislation when dealing with customers.”

After the transaction, PTSB will continue to have €900 million of interest-only buy-to-let loans on its balance sheet. Mr Crowley said that, unlike the loans being sold, the loans being kept were typically to customers who had other business with the bank.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times