PTSB’s €1.4bn sale is a sign it is preparing for a fresh loans crisis

Irish banks’ old problems haven’t gone away. As the sector faces into a fresh surge in bad loans, with thousands of businesses and households set to run into payments trouble in the coming months as a result of Covid-19, it is still dealing with a lingering glut of non-performing loans (NPLs) from the last crisis.

An average of 5.4 per cent of loans with Irish banks continue to be classified as non-performing, even after years of debt restructuring and portfolio sales. That compares with a figure of 1.6 per cent in the UK and an EU average of below 3 per cent.

Covid-19-induced NPLs haven’t begun to clock up yet, as banks were allowed by European regulators to continue to classify loans subject to temporary payment breaks as performing debts. While banks report that most of these have returned to regular payments following payment holidays, many will need further relief or restructuring – or go into outright default.

The State’s move last week into Level 5 restrictions, including the closure of non-essential retail outlets for six weeks, doesn’t help.

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News this week that Permanent TSB (PTSB) is selling €1.4 billion of boom-time, interest-only buy-to-let mortgages to Citigroup, in a deal that will see the loans sold on to bond market investors, is a sign the lender is looking to strengthen its balance sheet before the worst of the latest crisis materialises.

The portfolio sale will release €200 million of capital, and boost PTSB’s most important capital reserves ratio to 15.4 per cent from 13.9 per cent – well above the minimum 8.94 per cent regulators require and PTSB’s long-term target of 13 per cent. This will support the general view among analysts that the bank has enough in the coffers to weather even a severe downturn.

But the sale of what continue to be performing loans will result in PTSB’s NPL ratio rising to 7.7 per cent from 7 per cent. As banks prepare to deal with the mess caused by Covid-19, expect them to up the ante selling long-standing problem loans once the market for these assets picks up again.