The abacuses are being put through their paces at PTSB’s headquarters in Dublin as chief executive Eamonn Crowley seeks to rework the models that calculate the riskiness of the bank’s loans.
Crowley is aiming to make a submission to the Central Bank in the coming months that, all going well, will reduce the amount of expensive capital PTSB must hold in reserve to absorb potential shock losses.
Every €100 of mortgages the bank issues has a so-called risk weighting of about 40 per cent, against which it must hold capital. That is compared with an average of 25 per cent for its two larger rivals, who themselves are burdened by higher weightings than most European banks.
The high PTSB risk-weighted assets density is a result of PTSB’s experience of the arrears crisis following the financial crash, when as much as 28 per cent of its mortgages had soured.
It makes it more costly for PTSB to make loans, adding to the list of competitive disadvantages it endures against the other two.
Bank of America analysts have estimated PTSB could free up €270 million of capital on its balance sheet as a result of a recalibration of its models. RBC Capital Markets estimates a fair wind would release a little over €200 million. A Central Bank decision is expected later this year.
But Crowley is already dreaming of what he will do with the cash.
The chief executive of five years said last month that PTSB plans to start talks with the Government and UK lender NatWest, parent of Ulster Bank, this year on potentially using some surplus money to buy back some of their shares.
Irish taxpayers own 57 per cent of PTSB. NatWest owns 11.7 per cent, having received shares in 2022 as part payment for €6.8 billion of Ulster Bank loans it sold to PTSB. PTSB also plans to return to paying dividends next year for the first time since the financial crisis.
But The Irish Times reported earlier this month that Crowley is also eyeing other opportunities knowing that, even after the Ulster Bank deal, its €21.2 billion loan book is subscale compared with its larger rivals – and its own running costs.
PTSB made an unsolicited overture to buy Finance Ireland, the State’s largest nonbank lender, late last year and remains interested in doing a deal, according to sources.
Crowley is a dealmaker. The former AIB executive managed the sale of its Polish division in 2010 to Spain’s Santander and travelled with the deal
Finance Ireland, led by Billy Kane, had €1.1 billion of car, commercial real-estate, agri and small-business loans at the end of 2023. A deal would add scale to PTSB’s SME lending, particularly the commercial real-estate market, where it is not currently active, according to Davy analyst Diarmaid Sheridan.
Finance Ireland also held the title of more than €1.5 billion of residential mortgages at the end of 2023 – though the loans are held off its balance sheet through bond-market vehicles. It decided last month to stop mortgage lending, having effectively been out of this game in recent years.
Crowley is a dealmaker. The former AIB executive managed the sale of its Polish division in 2010 to Spain’s Santander and travelled with the deal. He subsequently was a key player in Santander buying KBC’s Polish operation. Four months into the job as PTSB chief executive, Crowley made an approach to NatWest in October 2020 to see what it could buy off Ulster Bank, hot off initial reports that it was considering winding down the Irish unit.
The issue this time around is a yawning price expectations gap between both sides. Finance Ireland is 51 per cent owned by US investments giant Pimco, which took its controlling stake almost three years ago in a deal that valued it at €255 million. Industry sources have suggested that PTSB would have to pay in excess of €300 million to get Pimco, M&G, which owns a further 40 per cent, and management to bite.
“There would be revenue diversification benefits as well as funding and operating cost synergies in the event of an acquisition of Finance Ireland by PTSB but the bank’s investor base is unlikely to be keen to see management agree to pay up significantly for these,” said John Cronin, founder of SeaPoint Insights, an independent banking and financial services research firm.
Ask Eamon Waters, the former owner of the Panda and Greenstar waste empire, who has seen PTSB shares slump 25 per cent since his Sretaw investment vehicle first revealed it had a stake in the bank in June 2023.
“Given their high funding costs and the resultant drag on profitability stemming from being a nonbank lender, the strategic logic for Finance Ireland being owned by an entity with access to cheaper funding is very strong,” Sretaw, which owns about 7 per cent of PTSB, said in response to questions from The Irish Times.
Finance Ireland funds itself in the international wholesale and capital markets, where rates spiked in recent years. Most of PTSB’s funding comes from cheap deposits.
However, Sretaw, which is known to be frustrated about PTSB’s cost base even as it is in the middle of cutting 300 jobs, said the bank would be better off giving excess capital back to shareholders if a deal couldn’t deliver a return “well above” the European banking sector’s estimated 13 per cent cost of equity. It also warned that any deal would need to be done out of cash resources, rather than by issuing shares, as PTSB’s stock trades at 42 per cent of its tangible net asset value.
Sretaw claims Finance Ireland would find it hard to command a valuation far above €100 million if it were a listed company, having made €10 million in net profits on net tangible assets of €265 million in 2023 – unless recent results and the future business plan “show a step change in prospects”.
“While there are obvious synergies from merging both company balance sheets, these gains should be shared and not solely accrue to the vendor,” it said.
Denis McGoldrick, an analyst with Goodbody Stockbrokers, said there is strategic logic to PTSB buying Finance Ireland.
However, he notes that PTSB may not want to increase its risk exposure if the international macroeconomic backdrop continues to worsen.
“The answer really comes down to the negotiated price,” he says.
It will be difficult to bridge the gap.
