Opportunity to grow in under-banked market

Inside Permanent TSB Group, there is a good bank trying to get out.

Whether it is given the chance is a multi-billion euro question.

It has a number of positive things going for it. The chief executive, Jeremy Masding came on board in January 2012. He is very much an old school, plain talking, conservative banker. He knows what a good bank looks like and he know how to get there. He is complemented by a sound management team.

Moreover, the economy is recovering. The market is under banked, which provides plenty of growth opportunities.

PTSB signed up 58,000 current accounts between April 2013 and March 2014. It has done €270m in new mortgage lending over 2013 and so far this year.

The good bank is now making a profit. It has €21.9bn in total assets and loans to customer of €14.2bn.

But there are huge legacy issues. The asset management unit has €6.4bn of troubled assets. The non-core division has €9.3bn of assets.

Moreover, 58% of its €17.6bn residential mortgage book are tracker mortgages and 85% of its €6.4bn buy-to-let mortgages are trackers. These products are priced off the main ECB rate which is at historically low levels and in most cases exceed the bank’s cost of funding. PTSB lost €75m last year on these mortgages.

The Government had been in negotiations with the troika about some form of external assistance for these tracker mortgages either opening up a credit line through the ECB or the ESM. These talks failed to bring about a resolution.

The group is not projected to return to profitability until 2017.

However, it has to undergo rigorous ECB asset quality review and stress tests this year. The bank is very well capitalised as it stands. Merrion Capital estimates that PTSB has €866m above the ECB threshold for the stress tests.

However, the stress tests will take a forward-looking view of the bank and determine whether it will be a viable entity in the future. It is certainly not a foregone conclusion that PTSB will come through these tests. As it stands, it has a limited ability to generate profits and capital.

However, even if its does fail, it has a cushion of €460m of contingent convertible capital notes, which could be used to plug the capital shortfall. If there is still a shortfall, then it puts the Government in a politically difficult position of recapitalising a bank.

PTSB is of systemic importance to the economy. Whether it forms part of a third banking force with Ulster Bank or whether it remains an independent entity, it would be a huge blow if the banking landscape was reduced to two domestic banks.