What is going on at PTSB and what's the story with its mortgages?

Permanent TSB chief executive and diehard fan of his native Welsh rugby team Jeremy Masding just can't get a decent run with the ball.

Six years into the job, Masding has consistently defied the naysayers: securing Brussels approval in early 2015 for PTSB's restructuring plan after years of speculation that it hadn't a hope; getting stock market investors to buy a €500 million stake in the bank the same year, months after it failed EU stress tests, and rebuilding the bank's share of the mortgage market to about 13 per cent, from a crisis-time low of 2 per cent.

He also managed, in November 2016, to sell the group’s remaining UK loans, five months after the disruptive Brexit referendum.

But even as Masding navigated all these obstacles, PTSB’s biggest problem – its chart-topping level of non-performing loans (NPLs) – has remained, despite years of work on reducing arrears.

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Some 28 per cent of the bank’s €21 billion loan book was classified as non-performing at the end of last June, more than five times the EU average.

This has been partly down to the fact that some of PTSB’s restructuring arrangements for troubled borrowers in recent years (such as splitting a mortgage in two, where repayments on part of the loan are put off to a future date) are still categorised as NPLs. That’s despite the fact that the borrower is sticking to the new terms.

As well as this, the forced sale of the bank’s largely performing £4.8 billion (€5.4 billion) UK mortgage portfolio in 2015 and 2016 – under directions from the European Union – raised the NPLs ratio in its remaining loan book.

Thirdly, despite years of working through its problem loans, some €2.68 billion of mortgages – or 13 per cent of all loans – remained “untreated” as of the middle of last year, either because the borrowers’ circumstances were so dire that the bank couldn’t find a workable solution or they refused to engage with the lender.

ECB pressure

The European Central Bank’s (ECB) supervisory arm has, in the past year, been piling the pressure on banks across the euro zone with high levels of NPLs to resolve the issue once and for all – or face more intrusive regulatory oversight, demands that they hold more expensive capital in reserve, and restrictions on shareholder dividends.

The ECB’s head of banking supervision, Danièle Nouy, upped the ante last month, arguing that high levels of NPLs are a drag on banks’ profitability, on their ability to build up reserves to cushion themselves from future shocks, and a distraction to management and staff.

“As supervisors, we have experienced intense discussions and a fair amount of resistance to tackling the issue,” Nouy told a roomful of bankers in Frankfurt on January 24th. “One of the arguments I have often heard is that it would hurt the economy if NPLs were brought down too fast. This argument boils down to the claim that now is not the right time. And, again, I ask: If not now, when?”

After five years of hard graft trying to sort out distressed loans, Ireland’s bailed-out banks are now left with their most problematic cases and least palatable options, such as ramping up repossessions or selling portfolios to private equity or hedge funds, commonly known as “vulture funds”.

And while loan sales have up until now mainly been the preserve of Nama, the liquidators of the Irish Bank Resolution Corporation and overseas lenders fleeing the market, PTSB moved this week to put up to €4 billion of NPLs, comprising both owner-occupier and buy-to-let mortgages, on the market.

Minister for Finance Paschal Donohoe, alive to the political fallout from a 75 per cent State-owned bank selling an estimated 20,000 mortgages, flagged the portfolio to his Cabinet colleagues on Tuesday before it was announced.

The mammoth portfolio is equivalent to almost one-fifth of PTSB's remaining loan book and subdivided into two projects, named Nepal and Tibet (two regions straddled by Mount Everest).

Political accusations

Fianna Fáil has been out in force, accusing banks of "outsourcing their dirty work" by selling NPLs on to unregulated vulture funds.

(AIB also currently has a €3.75 billion portfolio of commercial property and buy-to-let loans on the market, while Lloyds Banking Group is flogging its remaining €5 billion of Irish mortgages.)

"We have long believed that any attempts to dispose of large blocks of non-performing owner-occupier home loans to non-bank investors would meet with significant political and media pushback, as well as regulatory unease," said Owen Callan, analyst with Investec Ireland.

The authorities and PTSB have few options other than to proceed with the sale of the loans “given the somewhat otherwise intractable levels of NPLs which PTSB has”, he said.

A disposal would reduce PTSB’s NPL ratio from 28 per cent to below 10 per cent in one go. While the loans are already valued at a deeply-discounted price on the bank’s books, analysts reckon it will have to take a further €350 million hit to get them away. This provision is likely to be taken in the bank’s 2017 results, pushing it into another deep net annual loss.

But the removal of the bulk of PTSB’s problem loans will expose a bigger and more fundamental issue: the bank’s inability to generate a proper return for investors to justify its continued existence.

As a vastly shrunken PTSB grapples with a surge in regulatory costs following the crisis (disproportionately higher than for Ireland’s two pillar banks) and the headwind of needed investment, Goodbody Stockbrokers estimates it will only be able to generate a 4 per cent return on its net assets. By contrast, buying 10-year US government bonds would give you an almost 3 per cent yield these days.

Still, with a cleaned-up balance sheet, maybe PTSB will finally become a takeover target for a bigger lender capable of delivering a much hoped for third force in Irish banking.