State-owned banks reach critical point in recuperation
AIB and PTSB, both 99 per cent State-owned, will shortly publish interesting full-year results
PTSB Group chief executive Jeremy Masding: it appears that investors are warming to the idea of taking a punt on the company, helped by the recent renaissance of the Irish economy. Photograph: Alan Betson/The Irish Times
Both institutions are more than 99 per cent owned by the State and have yet to repay any of their bailout funds. A key focus of the results – AIB reports on Thursday while PTSB’s numbers are out on March 11th – will be commentary on their plans to raise external capital and/or deal with the preference shares and convertible contingent capital notes (CoCos) held by the State.
The pair are at different stages of their evolution. AIB is expected to report a return to profit for the full year for the first time since the crash. Goodbody analyst Eamonn Hughes has pencilled in a net profit of €1.1 billion for 2014, with impairments the “key swing factor”.
PTSB will be loss-making at group level but it will relay that the functioning retail bank is profitable. The group is being dragged into the red by mortgage arrears, loss-making trackers and non-core loans in the UK and Irish commercial property.
We might also be told that it has finally received European Commission approval for its restructuring plan. So it’s ironic that PTSB will be first out the gate in terms of securing external investors.
This is a factor of the bank failing the European Central Bank’s stress tests and needing to raise at least €125 million by July to plug the capital hole.
PTSB chief executive Jeremy Masding has done dozens of presentations since then to sell the bank’s story and it appears that investors are warming to the idea of taking a punt on the company, helped no doubt by the recent renaissance of the Irish economy.
Initially, the expectation was that PTSB would seek to raise about €300 million for a stake of between 30 and 40 per cent. Investors wouldn’t get out of bed for anything less, we were told.
Since then, that figure has been revised upwards to about €500 million, on foot of strong investor interest. In turn, this has opened up the possibility of the bank redeeming the €400 million of CoCos held by the State.
These have a maturity date of July 2016 and carry a hefty coupon of 10 per cent. So the bank’s new investors would be happy to have them off the books.
Legacy issuesMasding has also been busy of late marketing non-core Irish loan portfolios and has put its CHL loan book in the UK up for sale. It’s all part of the process of tidying up the legacy issues at the bank in advance of external investment.
Let’s imagine that private investors pay about €500 million for a third of the bank. That would value PTSB at €1.5 billion, well short of the €2.7 billion in bailout funds it has received from the State.
Even if you allow for the State getting €400 million from the CoCos as part of the transaction, it would still be owed €2.3 billion with its equity holding worth about €1 billion.
Why would the State sell such a chunky stake in PTSB when it has done so much of the heavy lifting over the past four years?
Why not give PTSB the €125 million it needs to plug the ECB’s capital hole and bide our time before selling it off over a period of years?
After all, the Irish economy is back in growth – unemployment is now below 10 per cent while exchequer returns for February showed that VAT receipts were up 16.2 per cent year on year. Consumers are spending again.
The reality is that writing another cheque for PTSB is politically unpalatable in what is effectively an election year.
Also, for all the good work of Masding and his senior colleagues in relaunching PTSB into personal lending and current accounts, it is a small retail bank with an expensive branch network operating in a peripheral European economy.
A year ago, Masding said its massive tracker mortgage book was a €75 million drag on profits. That’s a big number for a bank that stockbroker Davy has forecast will report total income of €315 million for 2014.
Davy has pencilled in a loss of €315 million for last year, €54 million for this year and €3 million for 2016.
This is an investment that is not without risk. Indeed, Masding has said on more than one occasion that the State won’t get its money back in full. On that basis, Michael Noonan is probably right to let someone else take a punt on PTSB.