Analysis: PTSB on the road to privatisation

After months of speculation, Permanent TSB has confirmed that it will seek to raise €525 million from private investors, of which €400 million will be used to repurchase the contingent capital notes held by the State.

This will be the first repayment of its €2.7 billion State bailout from 2011 and comes on the back of strong investor interest from its recent non-deal roadshows.

This process will effectively kick off on Thursday with an investor and analyst webcast.

The bank has yet to confirm what stake the investors will receive in PTSB for their €525 million but it will be substantial – somewhere between 30 and 45 per cent.

This will dilute the Government’s 99.2 per cent holding and would indicate that the State will be significantly underwater on its bailout funds when the capital raising is completed.

No surprise really, given that PTSB chief executive Jeremy Masding has indicated on a number of occasions that the State won't get all of its money back.

The hope would be that the addition of the private investors would help to drive PTSB’s growth in future years and enhance the value of the State’s holding without further recourse to taxpayers.

Securing private investment is a further endorsement of the Irish economic recovery and secures PTSB's future as a player in the retail banking market here, which is crying out for a challenger to AIB and Bank of Ireland's dominance.

The bank’s 134,500 small shareholders will be offered the opportunity to participate in this fund raising but it’s hard to imagine a large take-up, given that they were effectively wiped out by the State’s recapitalisation in 2011.

A couple of key pieces of the jigsaw towards its privatisation have been put in place with the bank's restructuring plan receiving approval from the European Commission in principle, and its asset deleveraging continuing with the sale of €5.1 billion of non-core loans in the UK and Ireland.

At a trading level, PTSB turned in a good result in 2014. Its income rose by €56 million to €308 million and the core bank moved into the black. The loss for the group as a whole – the retail bank and its legacy assets – reduced sharply to €48 million from €668 million.

The figures were helped by a €42 million impairment writeback as a result of higher collateral value and an improvement in its mortgage arrears.

Mortgage lending doubled in the year, retail deposits rose strongly with a 21 per cent rise in current account balances.

PTSB’s mortgage arrears problems eased significantly with the bank reporting that 8,000 accounts that were behind with their payments by 90 days or more coming out of arrears. This was a 32 per cent reduction since the peak of 2013.

In total, the group has offered 27,000 sustainable long-term solutions to its mortgage arrears customers.

Much work remains to be done. The bank has set out a number of medium term targets that it hopes to achieve by 2018.

These include a market share in key product areas of 13 to 17 per cent, a net interest margin of 1.7 per cent – this is below the 2 per cent target of other Irish banks – a cost-income ratio of 50 per cent, and an overall target for return on equity of about 10 per cent for the core bank. The group is also targeting a loan-to-deposit ratio of less than 130 per cent and common equity Tier 1 ratio of more than 11 per cent.

The company said these target are “both realistic and achievable”.

Masding has done the hard yards in recent years to get PTSB to this point. The coming weeks should put it on the road to privatisation and mark a new chapter in the company’s history.