The proposed raising of funds on the stockmarket by Permanent TSB represents another step in the gradual recovery of the banking sector. Permanent TSB still faces significant challenges and those buying its shares will be do so more because they have faith in the potential of the Irish economythan on the basis of the bank’s current finances. Still, success in the offering, if achieved, will provide the capital that the bank needs to meet regulatory rules and give it a basis for progress.
The State is also likely to sell down its shareholding as part of the deal, though it will retain a significant majority stake in the bank. Together with the repayment of other state capital by the bank, this will provide cash which can be put towards reducing the national debt. A substantially larger amount can be recouped as the State starts to sell down its shareholding in AIB, either later this year or in 2016.
In ideal circumstances, the State might have started to sell its stake in Permanent TSB when it was further down the road to recovery. However last year’s European banking stress tests, showing that the bank needed more capital, forced its hand. Fortunately, the low interest rate environment and the hunt by investors for opportunities should help the process and retaining a significant state stake means the exchequer can share in any uplift in years to come.
The Irish banking market has improved over the past couple of years but is still far from normal. Much work remains to be done in dealing with mortgage arrears. Meanwhile the recent controversy over standard variable mortgage rates shows that competition remains unsatisfactory. Pressures from the Central Bank and from public opinion may start banks such as Permanent TSB on the road to lowering interest rates, but in the long term a properly competitive market is the only thing which will finish the job.
The difficulty for the Government is that high interest rates are helping the finances of the banks, including Permanent TSB and AIB which it is hoping to sell. Nonetheless, in many cases the rates being charged are unsustainable and will be eaten away by competition, sooner or later. Those buying shares in Permanent TSB and in AIB will need to take this into account as they do their sums.