PTSB seen returning to loss amid surge in loan charges

Permanent TSB (PTSB), the last of the State's banks to return to profit after the financial crisis, is set to slide back to a loss this year as the Covid-19 pandemic leads to a surge in loan losses and a weakening of mortgage activity, according to Davy analysts.

The analysts currently see PTSB posting €32.9 million in loan impairment charges this year, resulting in a disproportionate hit to its bottom line compared to larger rivals. AIB is expected to set aside €235.3 million for bad loans and Bank of Ireland may ringfence €247 million, but both should remain profitable in 2020, according to a Davy report ahead of the lenders publishing first-quarter trading updates from next week.

"First-quarter trading updates will be set against the backdrop of unprecedented uncertainties and extraordinary supports from governments and regulatory authorities," said the Davy analysts Diarmaid Sheridan and Stephen Lyons in the report. "The longer-term impact of Covid-19 will be determined by the timelines over which business activity and employment levels begin to recover."

PTSB, in which the State owns a 75 per cent stake following a bailout in 2011, returned to profit in 2017 for the first time in a decade.

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However, it has consistently had the lowest level of profitability – or return on equity – in the sector, mainly due to its smaller balance sheet, focus on mortgages, and proportionately higher regulatory costs.

The impact of Covid-19 comes as an additional headache for PTSB's incoming chief executive as current incumbent Jeremy Masding prepares to step down. The Irish Times reported last month that the bank has chosen chief financial officer Eamonn Crowley to succeed him, subject to regulatory approval.

Worst performers

Unlike the last crisis, Irish banks have much higher levels of capital to absorb shock losses, and their reserves compare favourably to peers elsewhere in Europe, especially when viewed against total assets.

However, the Irish banking stocks have fallen 40-50 per cent in the past two months to count among the worst performers in Europe. Covid-19 has become the latest in a long list of issues – including Brexit, weak lending, low rates and political uncertainty – to weigh on the sector recently.

With Bank of Ireland set to be the first to issue a first-quarter trading update next Monday, the Davy analysts see the coronavirus crisis hitting banks’ fee income as corporate lending and foreign exchange transactions drop, while life assurance sales are also affected.

While recent Central Bank figures showed that mortgage lending was close to an inflection point with new lending topping loan repayments in the first quarter, Covid-19 has hit home loans activity since mid-March.

The number of mortgages approved by Irish banks in March declined by almost 10 per cent on the same month last year, according to figures this week from Banking & Payments Federation Ireland.

In addition, banks' incomes have also been squeezed as households and businesses have put more money on deposit at a time of uncertainty – when banks are struggling with excess liquidity. Banks are currently being charged of as much as 0.5 per cent for surplus funds placed with the European Central Bank.