PTSB’s viability as an independent entity must be questioned

Another year, another hefty loss for Permanent TSB, which is 75 per cent State owned. It recorded a bottom line deficit of €266 million last year due to another round of substantial exceptional costs, amounting to €414 million.

This figure was higher than the analysts' consensus of €345 million. Some €399 million related to the bank's disposal of its remaining holding in CHL in the UK and the sale of its Isle of Man business. About €15 million related to legacy risk costs.

PTSB’s path to recovery has been the longest of all the banks left standing in this market. The group hasn’t recorded a bottom line profit since 2007, the year before the banking and property markets crashed here.

However, there was progress on a number of fronts in 2016. Its gross new mortgage lending rose by 14 per cent to €525 million while its non-performing loans fell by €700 million. The bank also took a provision writeback of €68 million.

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Its net interest margin nudged its way up to 1.48 per cent, with an exit rate for the year of 1.59 per cent. That said, it remains well below that of AIB and Bank of Ireland and still some way shy of the 2 per cent level that is considered a benchmark for the industry.

The business continues to face significant headwinds. With a 9 per cent share of new mortgage lending, it continues to punch below its weight, given that KBC and Ulster Bank, its immediate comparators, are both operating above the 10 per cent mark.

The burden of regulation also weighs heavily on the bank. Its bill for bank levies and regulatory charges last year rose by €24 million to €61 million.

That's 13 per cent of its total income so it's no wonder that outgoing chairman Alan Cook called for "more proportionality" for small banks from Government and regulators in his review included in the annual report.

Uncertainties created by the regulatory environment, particularly in relation to the treatment of non-performing loans and risk weighted assets, forced the bank to postpone its plan to pay a dividend from 2017 earnings. This has been pushed out to 2019.

Legacy issues

Legacy issues also continue to hang in the air. Some 13,000 mortgage customers remain in arrears and default. In his review, chief executive Jeremy Masding said the bank would continue to seek solutions for those customers.

“However, for those customers where we believe there is no reasonable prospect of affordability, or where there is no engagement with us, regrettably we will be forced to seek alternative solutions to recover the outstanding capital.”

This means either repossession or a portfolio sale of problem loans to a private equity player. Neither is a palatable option for a bank that is still majority State owned.

Questions still have be asked about PTSB’s viability as an independent entity. It is a small bank in a small market. The cost base remains too high and it is playing catch-up with its rivals for market share in new lending.

It won 30,000 "new-to-PTSB" customers last year but this is less than half the level achieved by KBC Bank Ireland, which has 15 hubs around the country compared with PTSB's 77 branches.

Masding has done a lot of important work to save the bank in the past few years, completing a tricky deleveraging programme, managing a large book of problem loans, and restructuring the underlying trading business. It was an impossible juggling act in many ways.

He has installed a new senior management team over the past year or so with a view to attacking the market, now that the deleveraging has been completed.

Masding said “exciting times” lie ahead for PTSB as a challenger bank. It’s a bold claim given the experience of the past decade. Let’s hope he’s right.