Investec Ireland has set a price target for Permanent TSB's (PTSB) stock at less than a third of its €4.50 initial public offering (IPO) level four years' ago, as bank grapples with the impact of slow loan growth, lower-for-longer central bank rates and rising costs.
"We acknowledge the continued recovery progress being made by PTSB," said Investec Ireland banking analyst Owen Callan said, noting how the bank has lowered its non-performing loans (NPLs) since the middle of last year, with its recently-released first half figures showing its lending margins and mortgage market share are "performing well".
However, he said the lender remains vulnerable to slow loan growth in Ireland more than a decade after the crisis, and as interest rates remain under pressure. Almost 60 per cent of PTSB’s loan book is priced off the European Central Bank’s (ECB) main interest rate, which economists expect to remain lower for a longer period than envisaged six months’ ago amid a weakening outlook for the euro zone economy.
Mr Callan said that PTSB investment on IT and wage inflation at the bank will limit improvements to its cost-income ratio over the next five years. The ratio stood at 69 per cent in the first half of this year, whereas typically banks target a figure closer to 50 per cent.
The analyst cut his price target for PTSB’s shares to €1.45 from €2, though the new objective still points to more than 33 per cent upside from where the stock is currently changing hands.
“We see potentially stronger bull cases /[for the stock/] only emerging from either a significant turnaround in the interest rate outlook, or via consolidation with an existing incumbent or a large foreign entrant that could extract significant cost efficiencies from the current business model,” said Mr Callan.
PTSB remains 75 per cent State-owned, after the bank issued fresh equity and the Government sold some of its existing shares to stock market investors in 2015 at €4.50 a piece. This allowed the company to return to the main Dublin and London stock markets.
