Permanent TSB may find comfort in smaller scale

Tomorrow morning, Permanent TSB, which is 99.8 per cent owned by the State, will publish its results for the six months to the end of June.

It’s the smallest of the three Irish banks with State involvement and arguably the most challenged.

The Permo was decoupled from Irish Life in 2012 and spun off into a separate company called Permanent TSB Group Holdings plc.

Welshman Jeremy Masding was hired in January of last year and given the task of making a silk purse out of a sow's ear.

In an interview with me in March, Masding revealed that he actually considered closing the bank as a way to resolve its difficulties. In the end, he decided PTSB was worth saving and could play an important role in providing consumers with competition in what has been a shrinking retail banking sector here since the crash in 2008.

Masding’s plan was simple, relatively speaking. PTSB would follow a “bank + two” strategy. It would be a three-legged stool.

Back at work
One leg is the good bank, which is back in the market offering competitive current accounts, deposit savings and residential mortgages.

The second is its asset management unit, which has been set up from scratch and is tasked with working through PTSB’s considerable arrears problem. Based on his previous experience in this area from 20 years with Barclays Bank, Masding is convinced that PTSB has a best-in-class arrears division in the Irish market.

Leg number three is non-core. This comprises Capital Home Loans Ltd in the UK, which has a buy-to-let book, and about €9 billion in commercial real estate here. These will be run down over time.

It’s a given that the Permo will report a loss for the six-month period. It was €999 million in the red in 2012 and Goodbody has pencilled in a deficit of €770 million for this year as a whole.

It’s not clear what the figure will be for the half-year but it won’t be flattering.

Of more importance will be the updates on the progress it has made in terms of attracting new customers and in dealing with its mortgage arrears.

Terms of temptation
After a few years of being an outlier in terms of its standard variable mortgage rate, Permo is now offering more competitive terms in a bid to win new business. It recently began offering free banking to those willing to put €1,500 each month into their current accounts.

We already have a couple of indicators about how this strategy is evolving. On Monday, without much fanfare, PTSB put out a press release on its switching campaign. Buried in the middle of the release was the fact that “almost 30,000 customers have already opened a current account” with PTSB this year.

That’s about 1,000 a week. Three-quarters of these are under 35 – the next wave of first-time buyers.

These new customers are maintaining average balances of €4,000 per account, which suggests that PTSB has bolstered its deposits by €120 million.

On the arrears front, Minister for Finance Michael Noonan said in July that PTSB had offered 1,500 split mortgages this year, of which about 1,000 had been agreed with the borrower.

Warehoused elements
Split mortgages involve part of the loan being warehoused by the lender to ease the burden on the borrower. The warehoused portion gets dealt with at a later date.

More than 5,000 long-term "solutions" have been offered to those in arrears with their home loans and buy-to-let mortgages. That's in line with the 20 per cent target for end June set by the Central Bank of Ireland for institutions here. My information is that about 3,000 Permo customers have accepted these offers.

This is a good first step but it’s a long way from resolving Permo’s mortgage arrears problem (those behind in their payments by 90 days or more), which amounted to €5.5 billion at the end of last year from a total of €24.6 billion.

There’s also the Permo’s €14 billion book of tracker mortgages. It’s largely loss-making due to the cost of funding and the current low European Central Bank rate.

Masding has made no secret of his view that some form of external solution – probably a euro zone one – will be required to cure this problem. Permo certainly won't be able to solve the trackers problem on its own and the same probably goes for AIB and Bank of Ireland.

Permo was once a significant player in the retail banking market here. At the height of the property bubble, it was the State’s biggest mortgage lender. It was also a large lender of car finance and it made a big play for current accounts by offering various sweeteners.

Ignored
Its mutual roots were ignored as it believed its own hype and chased market share through stupid lending and bad commercial decisions.

After the crash, Permo was anonymous in the market, as the institution wrestled with its problem loans and ownership issues, resolved by its need for a €4 billion bailout from the State in 2011.

Masding believes it can come again but New Permanent TSB will be a smaller, more-focused bank. That’s fine. We know to our cost that big isn’t always beautiful when it comes to banks.