When Welsh banker Jeremy Masding became chief executive of Permanent TSB (PTSB) seven years ago, the company was a basket case and he knew there was a risk his tenure could be short.
“Back in 2012 . . . the bank was completely insolvent or illiquid,” Masding told members of the Oireachtas finance committee this week as part of their regular questioning of the heads of bailed-out banks.
Seven years later, Masding is the longest-surviving chief executive of an Irish bank, against the odds. Along the way he convinced the Government and the European Commission that PTSB had a future after its €4 billion bailout, returned it to the main Dublin stock market after failing European Union stress tests in spectacular fashion, completed the sale of its €6.5 billion UK loan book in 2016 after the Brexit vote, and offloaded €3.4 billion of non-performing loans (NPLs) last year without blowing a hole in the group's balance sheet.
And yet, a decade after the first murmurs began that PTSB should be swept up in a merger to create a “third force” in Irish banking, regulators, analysts and officials in the Government, which still owns 75 per cent of the lender, still question whether it has a long-term future as an independent entity.
European Central Bank (ECB) president Mario Draghi's downbeat comments this week on the euro-zone economy and a long-fingering of interest rate hikes will only add to the noise.
"The task of repairing PTSB when Masding came in was a daunting one given the NPLs challenge ahead of him," said Owen Callan, an analyst with Investec in Dublin.
“While he did very well in terms of stabilising the bank, forcing it to engage with borrowers in arrears and restructuring a significant portion of problem loans, the bank was caught out by a significant tightening of European regulatory rules around NPLs over 2015-2017.”
PTSB’s sale of its largely performing UK loan book under its EU restructuring plan, and the fact that some of its restructured loans – mainly mortgages that were split in two, with repayments on a portion of the debt being warehoused indefinitely – may never return to “performing status”, left PTSB with the highest NPL ratio among Irish bailed-out banks at the start of last year.
Still, Masding and his team managed to sell €2.1 billion of deep-in-arrears mortgages to US private equity firm Lone Star and to refinance a further €1.3 billion of mainly split loans in a bond market transaction, known as a securitisation, before the year was out.
The deals – occurring against the backdrop of rising political and public opposition to loan sales – cut PTSB’s ratio from 28 per cent of total loans to 10 per cent.
Masding signalled to the finance committee on Tuesday that a further loan sale may be on the cards, as it seeks to reduce its NPLs ratio to the European average of 3-4 per cent over the medium term amid pressure from regulators in the ECB.
Last year also saw PTSB’s total new lending volumes soar by 40 per cent to €1.5 billion, giving it more than a 15 per cent share of the Republic’s recovering mortgage market as borrowers were enticed by its cashback offer. Its share of the market was as low as 2 per cent at the height of the financial crisis.
“The taxpayer has been saved billions of additional funding and capital costs that would have been incurred had the bank been allowed to fail,” said Masding of the country’s once-largest mortgage lender. “PTSB, with a customer base of more than 1.1 million, has been saved as an important competitive force in a market that is not exactly overburdened with competitors.”
However, PTSB faces key challenges, according to Diarmaid Sheridan, an analyst with stockbrokers Davy. "The two things PTSB needs are an increase in interest rates and for the mortgage market to return to a normal level," he said. Neither is imminent.
Almost 60 per cent of PTSB mortgages are tracker loans linked to the ECB rate, which has been at a record low of zero for more than three years. That compares with 41 per cent and 30 per cent of the Irish mortgage books of Bank of Ireland and AIB, respectively.
“As such, PTSB is far more exposed to the zero-interest-rate policy of the ECB, particularly given the monoline business model which it relies on with mortgage lending, when compared to the full-service personal, business and institutional banking services offered by AIB and Bank of Ireland,” said Callan.
Draghi, who had been flagging up to recently that he expected interest rates to start to rise from the second half of this year, has booted out the possibility of a hike until 2020 at least.
If anything, the ECB president, who steps down in November, was even more dovish when he addressed reporters on Wednesday after a monetary policy meeting.
“The risks surrounding the euro-area growth outlook remain tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism, and vulnerability in emerging markets,” he said, adding that uncertainty over the nature and timing of Brexit were “part and parcel” of the cloudy picture.
A period of weak economic data across the single-currency region in recent times has also been “somewhat longer lasting” than expected, he said, even if the “estimated probabilities of a recession remain low”.
Euro-zone inflation was running at 1.5 per cent in March, compared with the ECB’s target of below but close to 2 per cent.
“Investor sentiment about the European banking market is probably as low as I’ve ever known it,” Masding told the Oireachtas committee, as concerns over “lower for longer” interest rates, and economic growth weigh.
Meanwhile, although mortgage lending rose by 20 per cent in the Republic last year to €8.7 billion, it remained well off what would be considered a fully-functioning market, as home construction ran at half the estimated demand for 35,000 homes and Central Bank of Ireland lending restrictions kept banks in check.
“The other big issue for Irish banks – and PTSB in particular – is the level of capital that has to be put against non-performing loans and mortgages,” according to Sheridan. “It’s going to take a very long time for Irish banks to prove to regulators that what happened here in the past won’t happen again. In the meantime, regulators are going to take a very conservative view of the Irish market.”
Irish banks must hold up to three times the amount of capital reserves against mortgages compared with the average European lender, due to the scale of the arrears crisis in the Republic after the crash, as well as the obstacles banks face in repossessing and selling homes when a loan goes into default, according to a Department of Finance study published last month.
Colin Hunt, AIB's chief executive of one month, put it more succinctly when he addressed the Oireachtas finance committee on Thursday.
“Irish banks must hold approximately €50 of capital for every €1,000 of lending, compared to €16 per €1,000 in the case of European banks,” he said. “This requirement to hold large and expensive provisions or buffers against the possibility that customer debts go into default mean additional costs for consumers.”
PTSB's sale of problem – including restructured – loans has also come at a cost. Deutsche Bank analysts led by David Lock highlighted in a report this week that PTSB's offloading of €3.4 billion of NPLs knocked €40 million – or the equivalent of 9 per cent – off its net interest income line. Further loan sales will also further dent income and earnings, they said.
With returns on equity (RoE) – a key measure of profitability relied on by share and bond investors in banks – depressed generally across Europe, Masding noted that PTSB is currently running at 3 per cent, less than a third of what the market expects from a healthy lender.
With the Government still holding a controlling stake in PTSB, its future ownership is out of Masding's hands
Twelve months ago, the then chair of the ECB’s banking supervision arm, Danièle Nouy, suggested to officials at the Department of Finance that a merger between PTSB and Royal Bank of Scotland’s high-cost Ulster Bank unit in the Republic would bolster the health of the country’s financial system.
Davy analysts estimated in a report that a combination would boost the weak profitability of the two lenders by almost 50 per cent and deliver an RoE close to 10 per cent through savings and other synergies. This, of course, would involve a cull of their overlapping branch networks, and staff cuts.
Still, the analysts concluded RBS management and the UK government, which owns 62.4 per cent of the group, would be unlikely to be interested in the near term in “doubling down” in Ireland with fresh investment.
In addition, a combination would be seen politically in Ireland – for the moment at least – as an erosion of competition, rather than a “much-needed strengthening of the sector”, they added.
A merger could also crystallise a loss on PTSB's €4 billion bailout. Taxpayers have recovered only €1.83 billion of this from the disposal of the bank's former sister company Irish Life in 2013, and the sale of shares and redemption of bailout bonds in the bank two years later.
Nevertheless, analysts and investors in PTSB, which has seen its market value fall by more than 70 per cent to below €570 million since it returned to the main Dublin and London stock markets almost four years ago, see a tie-up at some stage as inevitable.
“Given its high cost base, the relatively low return on equity profile of the bank, and the need for consistent investment in technology for both regulatory and customer needs, it is difficult to see how PTSB remains independent in the long term,” said Callan, while noting the “significant progress” it has made in the past few years.
Masding is all too aware of the commercial pressures for something to give.
“We will be part of the debate about how the market is shaped in the future,” he told the Oireachtas committee this week.
The problem is, with the Government still holding a controlling stake in PTSB, its future ownership, like much else affecting the bank, is out of Masding’s hands.
Permanent TSB timeline
1884: Irish Temperance Permanent Benefit Building Society formed
1940: Company changes it is name to Irish Permanent Building Society
1994: Demutualises and lists on stock market as Irish Permanent
1999: Merges with Irish Life to form Irish Life & Permanent
2001: Buys TSB Bank, turning banking arm into Permanent TSB
2008: PTSB is Republic’s biggest mortgage lender and has highest reliance on global funding as financial crisis strikes, with 272 per cent loans-to-deposit ratio
2011: PTSB is found to have €4 billion capital shortfall under stress tests; Government decides to take over Irish Life unit for €1.3 billion and inject €2.7 billion into banking unit
2012: Jeremy Masding becomes PTSB chief executive and assesses if the bank has a future. Sets up unit to deal with problem loans
2014: PTSB fails European stress tests
2015: EU approves PTSB restructuring plan; more than €500 million of shares in bank sold as it returns to main stock markets in June. Company admits almost 2,000 customers were wrongly denied tracker mortgages
2016: PTSB completes €8.4 billion deleveraging programme with sale of second part of UK mortgage book
2017: Bank returns to profit for first time in more than a decade
2018: PTSB sells €2.1 billion of non-performing loans to Lone Star, and refinances €1.3 billion of restructured loans in bond deal