Permanent TSB (PTSB) has begun to look into risks associated with thousands of mortgages, amounting to €2.5 billion, that were handed out before the crash and on interest-only terms until the loans mature.
Most of the loans, which account for 17 per cent of PTSB’s performing mortgages portfolio, are on buy-to-let properties. The bank said it is engaging with customers to work out “credible” principal repayment plans in order to estimate the long-term health of this portfolio.
This assessment is at an early stage and further details will be provided in the middle of the year, the bank said on Wednesday as it reported its 2019 results.
“We recognise that there has been a risk on this portfolio over a period of time,” chief financial officer Eamonn Crowley told analysts on a conference call. He also noted that the bank may ultimately be forced by regulators to treat a portion of the loans as non-performing if capital payments are not scheduled within eight to 15 years.
The bank cannot change the conditions of the loans as long as borrowers are meeting their contracted terms.
While outgoing chief executive Jeremy Masding said there "is no doubt that there will be some customers that will not reach the hurdle of a credible capital repayment plan", PTSB believes it has set appropriate loan-loss provisions against the portfolio.
Goodbody Stockbrokers analyst Eamonn Hughes suggested PTSB may seek to shift this portfolio off its balance sheet. Such loans may be an attractive proposition for a bond market refinancing, or securitisation, deal, even though most carry interest costs tracking the European Central Bank’s main rate and yielding a low rate of 1.3 per cent.
Meanwhile, Mr Masding said the bank faces “tough choices” to reduce costs as its underlying profit fell 21 per cent to €74 million last year amid a dip in net interest income following the sale of problem loans in 2018.
The Irish Times reported last October that PTSB was working on a restructuring plan that is expected to involve the closure of about a fifth of the lender’s 77-strong branch network and the elimination of 10-15 per cent of its workforce. The final blueprint is unlikely to be decided until Mr Masding’s successor is in place.
Mr Masding said late last year that he was planning to step down in 2020. The bank’s chairman, Robert Elliott, said in the annual report, published on Wednesday, that the recruitment process is at an “advanced stage”. Group chief financial officer Eamonn Crowley and director of operations Shane O’Sullivan have put their names forward for the top role.
PTSB’s pretax profit almost doubled to €42 million last year, as it booked lower levels of impairment losses on loans that were being sold and its level of provisioning for legacy legal cases declined.
Non-performing loans fell by 38 per cent last year to €1.05 billion, driven by the agreed sale of €506 million of problem mortgages to US investment firm Lone Star. The bank took a €20 million impairment charge against the loan sale, which was the bank’s third major transaction to move soured mortgages off its balance sheet since the middle of 2018.
Net interest income declines
The three deals have reduced its non-performing loan ratio from what chief executive Jeremy Masding called a “dangerous” 28 per cent to 6.4 per cent.
New lending volumes increased by 14 per cent during 2019 to €1.7 billion, with its mortgage market share rising to 15.5 per cent from 15.1 per cent. While the bank’s performing loan book grew as a result, its net loan portfolio declined by about €250 million to €15.6 million.
Mr Crowley told analysts that the bank is targeting a 16-18 per cent share of a growing market in the coming years.
The bank’s net interest income fell by €23 million to €356 million. However, its net interest margin – the difference between the average rates at which it funds itself and lends on to customers – edged up 0.02 percentage points during the year to 1.8 per cent.
“Our strong performance in 2019 reflects the attractiveness of our customer offering and the progress we are making in growing our business while managing costs rigorously,” said Mr Masding, who announced last October that he will be leaving the bank this year after eight years in the role.
PTSB said the mortgage market is expected to grow over the medium term. “While the market remains competitive, efficient distribution and disciplined pricing, coupled with a strong intermediary proposition, positions us well for the future,” the bank said.
