On Wednesday, Anne Bradley, Marian Corcoran and Celine Fitzgerald, all directors of PTSB, invested nearly €27,000 in the bank by buying shares. These non-executive board members, each earning a yearly fee of €60,000, making this initial investment that might be perceived as a symbol of their commitment, despite the bank losing approximately 30% of its value in the past year. In contrast, AIB bank’s value increased by 28% and Bank of Ireland’s by 7% during the same period.
The majority of PTSB (57%) is owned by taxpayers and the bank’s stock experienced a significant drop, falling by 7.3%, resulting in a slight loss for the three directors on their investment. There’s no denying that among the three surviving banks of the financial crash, PTSB is particularly vulnerable to the competition from Avant Money due to its smaller size.
Over the last 12 years, PTSB, under an EU restructuring plan tied to its €4 billion taxpayer bailout, and through the disposal of problem loans, saw its balance sheet shrink. However, the bank has managed to reposition itself by purchasing €6.25 billion of mortgage and small business loans from Ulster Bank, the latter having exited the market in the last two years. This has resulted in a 50% increase in its loan book.
PTSB also benefited from increasing interest rates in recent years, with the main lending rate of the European Central Bank climbing from zero to 4.5% over the 15 months up to last September. PTSB, earlier known as Permanent TSB, saw a substantial increase in operating profit last year, jumping from €14 million in 2023 to €164 million.
PTSB, the only one of the three domestic banks yet to resume regular payments to shareholders, stated last month that it will unveil a strategy later this year on how to recommence the payment of dividends, marking a first since the start of the financial crisis.
AIB and Bank of Ireland, two of the largest Irish banks, are projected to see a decrease in their underlying profits by 15% and 2% respectively, bringing them to approximately €2.19 billion and €1.98 billion for this year, according to calculations by Davy analyst Diarmaid Sheridan. This decrease considers anticipated cuts to formal interest rates that include deposit rates, an element that previously enhanced earnings for the banks due to the considerable volume of surplus cash held by the Central Bank.
At the close of the previous year, AIB was holding €33.3 billion in excess cash, while Bank of Ireland’s surpluses amounted to €28 billion, primarily earning the ECB’s deposit rate of 4%.
PTSB, however, is projected to face a 29% reduction in its underlying profits, bringing them down to roughly €118 million. Sheridan suggests this drop is attributed to increased investment plans. Nevertheless, PTSB hasn’t been generating as high returns from dormant customer deposits, only securing €1.69 billion with the Central Bank at the end of last year.
PTSB’s primary line of business, mortgage writing, has raised considerable concerns due to the cost involved. For every €100 of mortgages it signs, it must maintain costly capital against a risk weighting that exceeds 40%. This high RWA density is a result of their previous cycle experience, where 28% of mortgages proved non-performing. The risk on the new mortgages from AIB and Bank of Ireland is in the 20s.
This unequal competing landscape has led to PTSB’s market share for new mortgages decreasing from constituting 23% in the first half of the year to just 15% in the last three months of the same year. This has hindered its competitive standing against its larger rivals.
Nevertheless, PTSB is collaborating with advisers to reconstruct its internal loan risk model. The bank is hopeful for some relief from regulators by the end of next year, and Bank of America speculates that as a result, PTSB might be able to liberate around €270 million in capital.
Avant Money has revealed plans to broaden its range of products and services as it transitions into becoming a bank branch, initially commencing with deposits.
Non-bank lenders such as ICS Mortgages and Finance Ireland, who entered the housing finance market in the latter part of the previous decade, have essentially been forced out of the market in the past two years. This is due to escalating costs of funding from bond and wholesale markets, their primary source of finance.
Avant Money, another non-bank lender, has managed to sustain itself by using affordable funding from its banking parent. This has facilitated a 53% growth in its mortgage book to €2.4 billion in the year leading up to March.
The lender is aiming to widen its range of products and services as it transitions into a banking branch, starting initially with taking deposits. This sector is in desperate need of competition. Bankinter, a bank with a loan portfolio marginally larger than its deposit base, has a greater need for customer funds compared to Irish banks.
The Spanish group’s dedication to digital services will likely keep expenses in check. Despite a notably prosperous year for the banking sector in 2023, the operating costs of the sector that equals to around 40% for major competitors were significantly higher than that of PTSB, which equated to 66% of income. The ideal scenario for the industry is a ratio of 50% or below.
In addition, Bankinter appears to have drawn lessons from the regrettable circumstances of Ulster Bank and KBC Bank Ireland. These banks’ parent companies, NatWest Group and KBC Group, may regret their previous decision to pull out of the market before the earning prospects improved due to increasing interest rates. Their struggle to overcome Irish financial regulations to withdraw surplus capital from Irish branches had been a major annoyance.
By electing to establish a bank branch, rather than a subsidiary which would necessitate local supervision, Bankinter circumvents such potential issue.