Permanent TSB expects its planned acquisition of €7.6 billion of mortgages and small business loans from Ulster Bank to boost its profitability by 50 per cent over the medium term.
The lender said in an investor presentation on Wednesday, as it reported a €5 million net loss for the first half of 2021, that it expects to return to profit next year and see earnings rise to more than 9 per cent of shareholders’ equity over the medium term with the benefit of the Ulster Bank deal.
The 75 per cent State-owned bank had previously targeted a return of 6 per cent over time, double the rate it was delivering before the Covid-19 pandemic, but still off the key 8-10 per cent range that analysts and investors expect of a healthy bank.
"Given where we've come from as an organisation, I think that in itself is absolutely transformational," said Permanent TSB (PTSB) chief executive Eamonn Crowley, referring to the 9 per cent goal.
Analysts say that achieving this level of profitability will give the Government a greater chance of ultimately selling down its stake in the bank, which has so far only repaid €2.8 billion of its €4 billion crisis-era taxpayer bailout.
NatWest MOU
PTSB said last Friday that it had signed a memorandum of understanding (MOU) with Ulster Bank’s parent, NatWest Group, to buy a large part of the UK-owned bank’s loan book as it seeks to exit the Republic. This will increase PTSB’s loan book by over 50 per cent to €22.4 billion.
The legal agreement on a deal, also set to include 25 Ulster Bank branches and the transfer of up to 500 of its employees, is expected by the year end, paving the way for completion around the middle of 2022.
PTSB surprised the stock market when it said last week that it does not envisage the need to raise additional capital from shareholders to complete the transaction.
While analysts estimate the bank will need about €440 million of additional capital to support the Ulster Bank loan deal, part of this will be satisfied by NatWest accepting PTSB shares instead of cash as part payment for transaction. Additional capital will also be generated with PTSB buying the Ulster Bank loans at a discount to their fair value.
PTSB’s net loss of €5 million for the first half of the year was narrower than a €54 million loss for the year-earlier period. This was mainly a result of the bank’s loan impairment charge falling to €3 million from €75 million on the year, with Covid-19 so far failing to trigger a spike in mortgage defaults.
Net interest income
Still, interim chief financial officer Paul McCann said it was too early to consider releasing some of the provisions taken last year as the bank monitors the ongoing pandemic, gradual reopening of the economy, and the inevitable easing of Covid-19 Government supports for businesses and households. “At this time, we are comfortable with our prudence in relation to this,” he said.
PTSB’s net interest income – the difference between the average rates at which it funds itself and lends on to customers – fell by 11 per cent in the first half to €152 million, reflecting the sale of a portfolio of performing, interest-only buy-to-let loans and the impact of mortgage rate reductions late last year.
The bank reported new mortgage lending of €800 million in the first half. That represented 45 per cent growth on the year, outperforming the mortgage market which grew by 26 per cent, it said.
The bank's market share of mortgage drawdowns grew from 15.3 per cent at December 2020 to 17.5 per cent at the end of June. The mortgage market in Ireland is estimated to grow 19 per cent from €8.4 billion in 2020 to about €10 billion this year.
The Ulster Bank deal will leave PTSB with a share of more than 20 per cent of the total stock of Irish residential loans.
