Permanent TSB (PTSB) expects to return to profit this year for the first time since before the Covid-19 pandemic, even as it absorbs €75 million of one-off costs relating to its planned purchase of Ulster Bank loans in a deal that will increase its portfolio by close to 50 per cent.
Some €35 million of the costs relating to the project, including third-party fees and technology spending, were booked in the first half of the year, driving PTSB into a net loss of the same amount for the period, the bank said on Wednesday. PTSB posted a €5 million loss in the first six months of 2021.
PTSB agreed last year to buy €7.6 billion of Ulster loans, comprising mortgages, small business loans and an asset finance portfolio, as the UK-owned lender exits the market. The book is expected to have shrunk to €6.8 billion the time it is completed. The bulk of loans, made up of non-tracker mortgages, are set to transfer this year, with remainder moving early next year.
PTSB, led by chief executive Eamonn Crowley, is also taking over 25 of Ulster’s 88 branches in the Republic and taking on 450 of its former rival’s employees. The accord was cleared by the Competition and Consumer Protection Commission (CCPC) last week.
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PTSB executives said the bank is on track to return to profit this year as the exceptional loan integration costs will be more than offset by an accounting gain on the deal. As PTSB is taking over the Ulster assets at a discount to their fair value, it can book the difference as “badwill”, or what’s sometimes referred to as negative goodwill.
The bank’s earnings outlook has also improved as a result of the European Central Bank’s (ECB) move last week to lift its key interest rates by 0.5 of a percentage point, with more increases on the way as the monetary authority seeks to fight soaring inflation.
An automatic half-point rate increase across PTSB’s ECB tracker mortgages will add €27 million of annualised interest income, interim chief financial officer Declan Norgrove told analysts. Meanwhile, a move by the ECB’s deposit rate from minus 0.5 per cent to zero removes €16 million of annual charges that have applied to PTSB’s €3.2 billion of excess cash, stored with the Central Bank of Ireland.
PTSB expects a series of expected ECB rate hikes to help boost its net interest margin from 1.44 per cent this year to 2.25 per cent by 2025, even as it decided not to pass on the initial increase to non-tracker customers. The bank is now forecasting €300 million of operating profits by the middle of the decade, up from breaking even this year.
Total new lending rose by 22 per cent to €1 billion this year, with mortgages accounting for 90 per cent of the new business. PTSB expects the overall mortgage market to grow to €13 billion this year from €10.5 billion in 2021, supported by a significant increase year on year in the switcher market as customers seek to lock in lower rates in advance of expected ongoing interest rate increases.
Meanwhile, PTSB said it opened 70,000 new current and deposit accounts in the first half of this year, up 130 per cent from the same period in 2021, as customers of Ulster Bank and KBC Bank Ireland sought new homes for their banking.
Net interest income at PTSB rose 2 per cent to €155 million in the first half of the year, as 1.4 per cent growth in the loan book, to €14.1 billion, was offset by charges in its excess deposits and the impact of the sale of a portfolio of non-performing loans late last year.
Underlying operating costs rose 12 per cent to €189 million for the period, and PTSB said it now expects its full-year operating costs to rise 14 per cent, higher than the 12 per cent previously guided, as it accelerates investment to enhance its digital banking offering “while also accommodating inflationary pressures”.
Davy analyst Diarmaid Sheridan that the increased pace of investment and exceptional charges relating to the Ulster Bank deal will “ultimately provide a bank capable of delivering sustainable returns in the coming years”.
Ulster Bank’s parent, NatWest, will take a 16.7 per cent stake in PTSB as part payment for the loans deal. This will see the Irish State’s stake in PTSB declining from 75 per cent to 62.5 per cent.
