PTSB shares plunge as concerns over bad loans stall dividend

Permanent TSB shares plunged as much as 16 per cent on Wednesday as investors worried about the bank's plan to resort to loan sales and repossessions to resolve its worst €2.68 billion of mortgages, which will also delay a return to dividends.

The 75 per cent State-owned lender reported that its net profit shrank 55 per cent to €36 million in the first half from the year-earlier period, as it took a €6 million charge against bad loans. The group had released some €61 million of such provisions in the first six months of last year, driven by improving house prices.

PTSB has the highest ratio of non-performing loans (NPLs) among Irish banks at 28 per cent of its portfolio in June, even as the group and wider industry have cut arrears levels by 50 per cent from their 2013 peak. The bank's problem is compounded by the fact that it had to sell its largely performing UK mortgage book over the past two years under a European Union restructuring plan.

While more than half of the group’s €5.78 billion of NPLs are in some form of long-term restructuring or forbearance treatment, the remainder has continued to weigh on the group almost a decade after the crisis began.

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Troubled

"It is now right to acknowledge that the bank has an untreated book," group chief executive Jeremy Masding said, referring to troubled borrowers that cannot afford a workable loan restructure and those who have refused to engage with the bank.

“Ultimately the goal is to get the NPL ratio down to less than 10 per cent over the medium term. For that [portfolio] we’ll try and encourage the system to broaden access to mortgage-to-rent as much as we can, assisted voluntary sales, loan sales and, as a last resort, foreclosure.”

The prospect of accelerated repossessions and loan sales eating into the bank’s stock of bad-loan provisions prompted Goodbody Stockbrokers analysts to conclude that the plan “is likely to pose risks” to a view that PTSB holds “excess” provisions.

Shares in PTSB closed on Wednesday down 14 per cent at €2.10, valuing the group at €977 million.

The European Central Bank’s banking supervision arm has been pressing banks with high levels of NPLs to come up with credible plans to deal with the issue. Lenders face repercussions if they don’t, including more intrusive supervision, demand that they hold more expensive capital in reserve and restrictions on shareholder dividends.

Mr Masding said the bank’s aim of paying a dividend in early 2019 on next year’s results was now “very ambitious” and a low degree of probability, as the bank must demonstrate to the ECB that it is making meaningful progress on NPLs.

Losses

The bank also highlighted that it expects its common equity Tier 1 capital (CET1) ratio, a key gauge of a bank’s financial ability to withstand shock losses, to fall by four percentage points, including a 1.5 point adjustment taken in the first half, as it is forced to recognise more risk in its assets base under a review being taken under the eyes of the ECB. The bank expects its so-called risk-weighted assets, as a percentage of total assets, to increase as part of this ongoing review.

The bank’s CET1 ratio rose to 15 per cent in June from 14.9 per cent at the end of December as it retained more profits.

While total new lending at the bank rose by 62 per cent to €391 million during the first half, its loan book shrank by 2 per cent to €18.6 billion as customers continued to repay debt at a faster pace than taking out new borrowings.

Still, analysts at Davy said that the group’s 62 per cent growth in new mortgage lending was well ahead of the market’s 35 per cent expansion rate as of the end of May.

Meanwhile, Mr Masding signalled that PTSB is likely to have a net loan-loss provisions release for 2017 as a whole, as it reviews house price movements at the end of the year. Residential property prices were growing at an annual rate of 11.9 per cent in Ireland as of May, according to the latest figures from the Central Statistics Office.