DBRS: Permanent tsb Reports Net Loss in 2013 Driven by High Impairment Charges

Summary:
• Still elevated impairment charges lead to a sizeable net loss for Permanent tsb.
• Successful re-entry into the market with good growth in deposits and current accounts.
• Although asset quality remains weak, more active management of arrears is beginning to demonstrate positive momentum.
• DBRS rates permanent tsb p.l.c at BB (low), with a Negative trend, for Non-Guaranteed Long-Term Debt & Deposits.

DBRS Ratings Limited (DBRS) considers the 2013 results for Permanent tsb Group Holdings plc (PTSB or the Bank) as reflecting the significant challenges the Bank is still facing. For the full-year PTSB reported an underlying loss before impairment charges and exceptional items of EUR 48 million, a slight improvement on the EUR 86 million underlying loss in 2012. The lower loss primarily reflects the expiry of the Eligible Liabilities Guarantee scheme (ELG) in March 2013 as the fees related to this have reduced considerably. Positively, the Bank reported a 10 basis points (bps) year-on-year improvement in net interest margin (NIM), excluding ELG fees, to 0.82% in 2013. In the core retail bank, referred to as permanent tsb Strategic Business Unit, NIM also improved, standing at 1.03%. However, the Bank reported an underlying loss of EUR 977 million in 2013 due to an increased impairment charge of EUR 929 million, although this was mitigated to a certain degree by exceptional items that totalled EUR 309 million and an exceptional tax credit of EUR 414 million that led to a net loss after tax of EUR 261 million. DBRS notes that the impairment charge incorporates approximately EUR 300 million as a result of the balance sheet assessment conducted by the Central Bank of Ireland in 4Q13.

From DBRS’s perspective, part of the challenge facing the Bank is to reinvigorate the franchise while completing its restructuring. Therefore DBRS views positively the business growth that the Bank has seen in 2013 in certain product lines. Over 58,000 new current accounts have been opened since the Bank launched a fee-free product in April 2013, and customer deposits (excluding deposits from the government) have shown good growth, up 5% on 2012.

The level of impaired loans further increased in 2013, mainly driven by the domestic mortgage portfolios. Nonetheless, the investment in arrears management is beginning to have a positive impact with total arrears now declining. In particular, the performance of the buy-to-let book has improved with loans over 90 days in arrears reducing to a still high 16.5% at end-2013 from 21% at end-2012. The increased impairment provisions taken by the Bank in 2013 has led to a slight improvement in the coverage ratio to 47% at end-2013. Nevertheless, asset quality remains weak with non-performing loans (defined as loans which are greater than 90 days in arrears, or impaired) accounting for 26% of the EUR 33.3 billion total loan book.

The Bank’s Core Tier 1 ratio under Basel II at end-2013 was 13.1%, down from 18% at end-2012. The reduction reflects the loss in 2013, as well as an increase in risk weighted assets as a result of the balance sheet assessment. Under the transitional rules that became effective as of 1 January 2014, the fully loaded Basel III Common Equity Tier 1 capital ratio would have been 13.4% at end-2013. Although the capital level ratios are relatively high at the moment DBRS anticipates further reduction in capital due to the Bank’s ongoing restructuring, thus highlighting the need for the Bank to return to profitability in order to be able to generate capital through earnings retention.

DBRS rates PTSB at BB (low), with a Negative trend, for Non-Guaranteed Long-Term Debt & Deposits.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]