Permanent TSB, allowed by indulgent governments and regulators to limp along for much of the past decade because it was simply too much of a hassle to pull the plug, is now on a path to the previously unthinkable: paying investors a regular dividend.
The smallest surviving Irish bailed-out bank’s headline results for the first half of this year, released on Wednesday, may have been less than inspiring. Its net interest margin (NIM) – the difference between the rates at which it funds itself and lends on to customers – had contracted. Total loans had crept up less than 1 per cent, operating costs jumped 12 per cent and were forecast to rise further, and the lender’s underlying loss for the period widened.
And although chief executive Eamonn Crowley predicted that the company would return to profit this year for the first time since before the Covid-19 pandemic, this will only be down to an accounting trick as the bank records a one-off gain on buying a bunch of Ulster Bank loans from UK banking giant NatWest.
However, the phased purchase of €6.8 billion of Ulster Bank non-tracker mortgages, small business loans and an asset finance portfolio over the next 12 months – which will increase PTSB’s loan book by as much as 50 per cent – and the start of a cycle of official interest rate hikes have completely changed the outlook for the bank.
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Before it emerged early last year that PTSB was in talks to buy much of Ulster Bank loans, as the latter announced it was quitting the market, the 75 per cent Irish taxpayer-owned lender was looking at posting profit returns that left it struggling to justify its existence.
Analysts at the time were talking about the bank delivering only 2-3 per cent annual returns on shareholders’ equity (RoE) over the subsequent years – compared with rates of 8-10 per cent that are seen as signs of a viable bank.
The Ulster Bank deal has been a game-changer. But even as recently as March, Crowley was playing down the prospect of PTSB returning to paying dividends for the first time since the financial crash as being “a number of years away”.
He had good reason. At the time, PTSB was projecting that it would be making operating profits in the region of €200 million and delivering an RoE of 5 per cent by 2024, rising gradually to about 9 per cent over the “medium term”.
However, with the European Central Bank (ECB) having last week started – belatedly, compared with other major central banks – to hike interest rates, PTSB sees its NIM widening from 1.44 per cent this year to 2.25 per cent by the end of 2025, helping the group to deliver €300 million of operating profits by then.
The bank is now predicting that it will be generating an RoE of 10 per cent by the middle of the decade – something that was inconceivable two years ago when Crowley took over the helm. Of course, this assumes that the sky doesn’t fall in on the currently pretty fragile global economy.
PTSB has been blocked by regulators from paying a dividend since its €4 billion bailout more than a decade ago.
Elsewhere, AIB resumed dividends in 2017 to make itself more attractive to investors as the Government was selling a €3.8 billion stake in the bank on the market. Bank of Ireland following suit a year later. However, both suspended shareholder payments during the worst of the Covid-19 crisis as regulators pressed banks to conserve capital. Even Ulster Bank and KBC Bank Ireland had returned to making distributions to their overseas parents before they decided to call it quits on the Irish market last year.
However, Crowley was much more upbeat on a call with analysts on Wednesday on the prospects of remunerating shareholders than he had ever been previously, saying: “The future in that respect, I’d suggest, looks brighter than it has been before.”
But when can shareholders, led by the Irish State and NatWest (which is taking a 16.7 per cent holding in PTSB as part payment for Ulster Bank loans), expect to see a cheque?
There is no chance that dividends will be paid out on any profits made this year, as earnings will be driven by an accounting manoeuvre. As PTSB is buying the Ulster Bank assets at a discount to their fair value, it will be booking the difference as a “badwill” gain, or what’s sometimes referred to as negative goodwill.
PTSB aims to have taken over Ulster Bank’s non-tracker mortgages by the end of this year, with the remainder of the loans set to travel in early 2023. It will be too preoccupied next year with completing the remainder of the Ulster Bank transfers and proving to regulators and shareholders that it has the capacity to run a much bigger business to have any meaningful discussions on payouts.
However, the bank’s new and dramatically improved profitability guidance suggests Crowley could have a strong case to put to regulators to have the dividend blocker lifted in 2024.
While that’ll be 16 years from PTSB’s last payout, it’s way sooner than even its more sanguine followers had been expecting.
