State’s PTSB stake could fall to 29% if market backs Ulster Bank deal, report says

The Government could see the State's stake in Permanent TSB (PTSB) fall from 75 per cent to 29 per cent if it deferred to stock market investors to provide capital needed for the bank to buy a chunk of Ulster Bank's loan book, according to a Deutsche Bank analysis.

PTSB would most likely be interested in €9 billion of Ulster Bank's €20 billion loan book, including non-tracker mortgages and small-business and consumer loans, Deutsche Bank analyst Robert Noble said in a report distributed to clients on Wednesday. That's the equivalent of 60 per cent of the size of PTSB's own loan book.

The estimated €550 million of capital reserves PTSB would need to raise to support the acquisition would eclipse its own €485 million market value.

PTSB and AIB confirmed on February 19th that they were in talks to buy Ulster Bank loans, after the UK-owned lender's parent, NatWest, confirmed that it was withdrawing from the Republic over a number of years.

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AIB has sufficient surplus capital to buy the €4 billion of Ulster Bank corporate and small-business loans it plans to purchase. Minister for Finance Paschal Donohoe has said he would have to consider carefully any PTSB proposal in this regard that would require taxpayer funds.

Deutsche said it would be “a tall order” to ask the Government to provide more equity for PTSB “from a political perspective or within EU state aid rules”. On the other hand, with PTSB’s stock currently trading at only 30 per cent of the estimated value of its assets, a share sale at current levels to private investors only would see them acquire stock at a deep discount, heavily diluting the State holding.

The State holding could fall to 29 per cent as a result, according to Deutsche Bank. “Ideally the Government would provide circa €400 million of the equity and the rest from private shareholder,” Mr Noble said.

‘Extremely beneficial’

The report said a PTSB deal that allows it to cherry-pick Ulster Bank loans, branches and deposits “could be extremely beneficial”, though it is difficult to make estimates at this stage.

“PTSB does suffer from a lack of scale and has limited exposure to the SME market – and a combination with Ulster can address parts of the problem,” the analyst said, adding that without a deal, PTSB would take five years to build its profitability to deliver a 6 per cent return on shareholders’ equity, which is below what’s considered acceptable by investors.

AIB, meanwhile, could deliver a 9.4 per cent return on equity on the Ulster Bank loans it plans to acquire, which is in excess of its 8 per cent medium-term group target.

While NatWest’s move to wind down Ulster Bank in the Republic is largely designed to get hold of excess capital in the operation, Deutsche Bank said this will “take a very long time” if the lender is left with a €6.8 billion low-yielding tracker mortgage book and €1.5 billion of non-performing loans. It estimates that £2.2 billion (€2.55 billion) of surplus capital is trapped in Ulster Bank.