PTSB most exposed Irish lender to competitive threat from Spanish move into market

PTSB directors Anne Bradley, Marian Corcoran and Celine Fitzgerald ventured into the stock market on Wednesday to buy almost €27,000 of shares in the bank between them.

The first-time purchases by the non-executive board members may have been designed to send a signal of support – a small one, mind, given they’re each earning €60,000 a year in fees – for a company that had lost about 30 per cent of its value over the previous 12 months. By contrast, AIB had advanced 28 per cent and Bank of Ireland 7 per cent.

However, news on Friday morning – first reported online by The Irish Times – that Spain’s Bankinter is planning to enter the Republic’s banking market with a digital offering, building on the success of its fledgling €3.3 billion Avant Money mortgage and consumer finance books, sent shares in Irish banks lower.

PTSB, which is 57 per cent taxpayer-owned, was rattled the most, with its stock falling as much as 7.3 per cent, leaving the three directors marginally under water on their investment.

There can be little doubt that of the three banks that survived the financial crash and its legacy, PTSB, the smallest, is most exposed to the competitive threat of Avant Money.

Following a dozen years of balance sheet shrinkage – driven by loan book sales under an EU restructuring plan tied to its €4 billion taxpayer bailout, and disposals of problem loans – PTSB has managed to transform itself with the purchase of €6.25 billion in mortgage and small business loans from the departing Ulster Bank over the past two years, increasing its loan book by 50 per cent.

[ Q&A: What does Bankinter move to Irish market mean for me? ]

The spike in interest rates in recent years has also helped, with the European Central Bank’s main lending rate moving from zero to 4.5 per cent over the 15 months to last September.

PTSB, formerly known as Permanent TSB, saw its operating profit soar last year to €164 million from €14 million for 2023. Last month, it said it will announce a policy later this year on how it plans to return to paying dividends for the first time since the onset of the financial crisis. (It is alone among the three domestic banks not to return yet to making regular payments to shareholders.)

AIB and Bank of Ireland are on track to see underlying profits dip by 15 per cent and 2 per cent respectively this year to €2.19 billion and €1.98 billion following an exceptional 2023, Davy analyst Diarmaid Sheridan calculated in a report published this week. This factors in expected cuts to official interest rates, including deposit rates, which had fuelled outsize earnings at the two largest Irish banks because of the high level of excess cash stored with the Central Bank.

AIB had €33.3 billion of surplus cash and Bank of Ireland a further €28 billion with the Central Bank as of December, the vast majority of the money earning the ECB’s 4 per cent deposit rate.

However, PTSB’s underlying profits are poised to drop 29 per cent this year to €118 million, according to Sheridan, as the group ups investment. (It hasn’t been earning as much as its larger rivals on idle customer deposits, within only €1.69 billion resting with the Central Bank as of the end of last year.)

The big concern surrounding PTSB is the cost of writing mortgages – still, by far, its main line of business. Every €100 of mortgages the bank issues has a risk weighting of over 40 per cent, against which it must hold expensive capital. The high risk-weighted assets (RWA) density results from the bank’s experience of the last cycle when 28 per cent of its mortgages were non-performing. The risk weighing on new Bank of Ireland and AIB mortgages is in the 20s.

The uneven playing field contributed to PTSB’s market share for new mortgages sliding to 15 per cent in the final three months of last year from 23 per cent for the first half – affecting its ability to compete against the big two.

To be sure, PTSB is working with advisers on a plan to overhaul its internal loan risk model, with the hope it will get some relief from regulators by the end of next year. Bank of America reckons PTSB will be able to free up as much as €270 million of capital as a result.

Avant Money said it is looking to expand its product and service offerings as it becomes a bank branch, beginning initially with deposits

Non-bank lenders ICS Mortgages and Finance Ireland, which entered the home loans market at the back end of the last decade, have essentially been squeezed out of the market over the past two years as rates for wholesale and bond markets funding, their source of finance, spiralled.

Avant Money is also a nonbank lender. However, it been able to rely on relatively cheap funding from its banking parent, helping its mortgage book increase 53 per cent to €2.4 billion in the 12 months to March.

Avant Money said it is looking to expand its product and service offerings as it becomes a bank branch, beginning initially with deposits. It’s an area crying out for competition. Bankinter, with a loan book that slightly exceeds its deposit base, needs customers’ money more than the Irish banks.

The Spanish group’s focus on a digital offering will keep costs under control. Even as the banking sector enjoyed an exceptional year in 2023, PTSB’s running costs equated to 66 per cent of income, way above the ratios of around 40 per cent for its larger rivals. The industry Holy Grail is a figure of 50 per cent or lower.

Bankinter also seems to have learned a lesson from the unhappy experience of Ulster Bank and KBC Bank Ireland. Their parents, NatWest Group and KBC Group, may now be ruing exiting the market before the earnings outlook for the sector turned with rising interest rates. But their inability to get past Irish financial regulators to extract excess capital in Irish subsidiaries had been a huge source of frustration.

By opting to set up a branch, rather than a subsidiary that would require local supervision, Bankinter avoids any such risk.