Ulster Bank owner may take Permanent TSB stake in loans deal

UK banking giant NatWest Group may take a sizeable minority stake in Permanent TSB (PTSB) as part of a deal to sell a large part of its Ulster Bank unit's loans and other assets to the Irish State-controlled lender, according to sources familiar with the discussions.

PTSB is understood to be interested in about €9 billion of Ulster Bank’s €20 billion loan book, including non-tracker mortgages and small-business and consumer loans, as well as deposits and part of the UK-owned bank’s branch network.

Analysts estimate PTSB would need to raise more than €500 million of additional equity to support such a deal, not far off the bank’s own current market value of about €540 million.

PTSB said in February that it was in talks to buy certain Ulster Bank assets and liabilities after NatWest confirmed that it was winding down its unit in the Republic as it struggles to make sufficient profit returns.

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Eamonn Crowley, PTSB's chief executive, told reporters last month the bank would approach both stock-market investors and the Government, which owns 75 per cent of the group, for cash if it needed to raise capital to buy Ulster Bank loans.

Mr Crowley told the Oireachtas finance committee this week that talks with NatWest had been “constructive”. It also indicated that some of the equity gap could be plugged by acquiring loans at a discount.

The chief executive is understood to have been referring to an accounting device called ‘badwill’, or what is sometimes referred to as negative goodwill, when an extraordinary gain is booked in a business combination involving assets being bought at a discount to their fair value.

The European Central Bank (ECB) said earlier this year that it would recognise verified accounting badwill from a capital point of view when assessing deals, as it pushes for banking consolidation at a time when banking asset valuations are under pressure. That’s as long as the gains are not used for the payment of shareholder dividends.

Publicly-listed euro-zone banks are currently trading at just 60 per cent of their book value – or how they value their own assets – amid investor concerns about the effect of lower-for-longer interest rates on lending margins, muted loan demand and the general economic outlook.

Capital demands

The impact of particularly high regulatory capital demands on Irish banks, a legacy of the financial crisis, has left them trading at an even deeper discount. Bank of Ireland and AIB are currently trading at about 50 per cent of their estimated book value for this year, while PTSB is at 27 per cent.

The prospect of NatWest, which is almost 55 per cent owned by UK taxpayers, taking a stake in PTSB as part payment for a large part of Ulster Bank would further reduce the amount of money that PTSB would need to raise. Taking an equity interest, potentially of between 10 per cent and 20 per cent, would also reduce the prospect of NatWest being embarrassed should the assets subsequently rise substantially in value.

Spokeswomen for NatWest and PTSB declined to comment.

NatWest’s talks to sell €4 billion of Ulster Bank corporate and other business loans to AIB are more advanced. AIB’s healthy capital levels mean that it would not need to raise additional money to complete a deal.