Annual Financial Report Commentary

RNS Number : 8024Y

Permanent TSB Group Holdings PLC

08 March 2017

 

07:00hrs 08 March 2017

PERMANENT TSB GROUP HOLDINGS PLC

2016 ANNUAL RESULTS FOR THE 12 MONTHS ENDED 31 DECEMBER 2016

Permanent TSB Group Holdings plc ('the Bank') today reports its annual results.

Key Points:                                                        

·      Headline Profit Before Exceptional Items and Tax of €188 million

·      Profit Before Exceptional Items and Tax (excluding one-off gain from sale of a share held in Visa Europe of €29 million) of €159 million, an improvement of €133 million over 2015

·      Loss after Tax of €266 million including Exceptional Items of €414 million relating to completion of Deleveraging Programme and other Restructuring Costs

·      New Customer Lending increased by 14% Year-on-Year (YoY) to €591 million

·      30,000 'new-to-PTSB' customers acquired in the year

·      Net Interest Margin (excluding ELG fees) increased by 0.36% from 1.12% in 2015 to 1.48% (Core Bank NIM - 1.76%)

·      Adjusted Cost Income Ratio¹ reduced by nine percentage points from 74% to 65%

·      Impairment Write-Back of €68 million, an improvement of €103 million on 2015

·      NPLs reduced further by €0.7 billion (or 11%) from December 2015 to €5.9 billion

·      Non-Core deleveraging programme now fully complete with the sale of UK and IOM loan portfolios

·      Fully Loaded CET1 ratio remained robust at 14.9%

Jeremy Masding, Group Chief Executive, said:

"The Bank is continuing to deliver its operational turnaround successfully and at pace. In doing so, we delivered a strong operating performance with significant trading profitability and the completion of a three-year deleveraging programme of over €9 billion that now allows us to focus exclusively on delivering profitable growth.

Looking forward, we can build on a great franchise, a loyal customer base and a talented group of committed people. We have all the foundations for success so we must now deliver sustainable value for our customers and our owners - we are confident we will do that."

Trading Performance

The overall trading performance for 2016 showed steady progress as the Bank broadened and improved its product offering and refreshed its brand.

In 2016, we acquired 30,000 'new-to-PTSB' customers and opened over 37,000 new Current Accounts. Current Account balances increased by 12% in the year. Irish Retail Deposits reduced by €0.8 billion or 7%. This reflects the continued reduction in deposit interest rates for personal customers across the Irish banking industry. Despite the YoY reduction, Customer Deposits continue to represent 80% of our funding base.

Total new customer lending was up 14% YoY. Included within this is €525 million in new mortgage lending which grew by 14% YoY. The Bank introduced a number of new mortgage propositions including the '3-in-1' mortgage and a series of competitive fixed rate mortgages. Despite the positive YoY increase, growth in the mortgage market continues to be subdued due to supply constraints in the Irish housing market.

New term lending in 2016 was €66 million, up 10% YoY. The Bank saw a strong pick-up in the new lending run rate following the launch of its market-leading online personal lending platform in the third quarter of 2016.

Operating Performance

NIM (excluding ELG fees) increased by 0.36% from 1.12% in 2015 to 1.48% in 2016 (Q4 NIM - 1.59%) primarily due to the reduction in the Cost of Funds which fell from 1.11% in 2015 to 0.70%, and the completion of the Non-Core deleveraging programme. Asset Margins have reduced marginally to 2.13% in 2016 from 2.18% in 2015. Following the completion of the deleveraging programme, Group NIM will now converge with Core Bank NIM which is expected to be over 1.70% in Q1 2017. We expect to maintain a NIM of 1.80% - 1.90% over the medium term. However, the evolution of MREL requirements and market dynamics will be the key dependencies in achieving this.

We recognised a gain of €29 million from the sale of a share held in Visa Europe in 2016 which is included in Other Operating Income.

Total Operating Expenses (excluding Bank Levy and Regulatory Charges) remained flat versus 2015.

Bank Levy and Regulatory Charges amounted to €61 million 2016 compared to €37 million in 2015. We expect to pay €23 million towards the Bank Levy in 2017 and 2018. Whilst the exact quantum of the contribution to the Single Resolution Fund and the Deposit Guarantee Scheme for 2017 and 2018 years is not yet known, we expect the Bank Levy and Regulatory Charges to total between €60-€70 million.

The Headline Cost Income Ratio for 2016 was 74% compared to 84% in 2015. Excluding the Bank Levy, Regulatory Charges and the gain from sale of the share held in Visa Europe, this reduces significantly to 65%²  in 2016 which is an improvement of 9 percentage points on 2015. We are targeting an Adjusted Cost Income Ratio (excluding Bank Levy and Regulatory Costs) of under 60% over the medium term.

Total Impairment Charge decreased by €103 million resulting in a total write-back of €68 million in 2016. Included within the write-back was €89 million that relates to a revision to the house price assumptions within our ROI residential mortgage provisioning models. Aside from the €89 million HPI-related write-back, the Bank recorded an underlying Impairment Charge of €21 million for 2016 primarily arising from updated valuations relating to a particular cohort of high exposure buy-to-let NPLs.

The Underlying Cost of Risk³ for 2016 was 10 basis points, an improvement of 4 basis points over 2015. Over the medium term, we expect the underlying charge to move to 30-40 basis points, in line with previous guidance.

Having delivered a HPI write-back of €89m in 2016, we expect future HPI write-backs to be lower than the outturn in 2016 and arising over a longer period of time, if the growth in house prices continue. We will continue to remain conservative in our approach to HPI-related provision write-backs; in particular, given the regulatory focus on NPLs, and the potential impact of IFRS 9. The completion of the Non-Core deleveraging programme, with the sale of the UK and IOM loan portfolios resulted in a loss on disposal of €399 million which is included in Exceptional Items. Exceptional Items also include other net Restructuring Costs of €15 million.

Balance Sheet

The Bank's balance sheet has reduced by approximately 20% in 2016 mainly due to deleveraging the Non-Core UK and IOM portfolios. As a result, the Funding Profile also has been re-shaped and improved with Customer Deposits now representing 80% of Total Funding, while ECB Funding has been reduced to 7% of Total Funding from 18% in 2015.

Asset Quality

NPLs reduced by approximately €0.7 billion from €6.6 billion in 2015 to €5.9 billion in 2016. This comprises a reduction of €0.5 billion in the ROI Home Loan and Buy-To-Let portfolios mainly resulting from loan cures arising from improved arrears treatment outcomes, with the balance of the reduction primarily relating to the deleveraged Non-Core portfolios.

54% of the Residential NPL balances at 31 December 2016 (or 65% by number of cases) remain in some form of forbearance treatment ("Treated Loans"). These NPLs yield 1.7% in interest. Approximately 93% of these loans are performing to their restructured terms. These customers are contracted to engage with us once every three years through 'Recurring Customer Reviews'. While it is too early to quantify the impact, we have now carried out over 5,000 Recurring Customer Reviews in the last six months and we have seen a high level of customer engagement. These reviews will benefit both the customer and the Bank over the longer term.

In relation to the remaining 46% of NPLs of €2.6 billion, approximately €0.7 billion of balances or 12% are en route to closure either through voluntary sales or repossessions and approximately €0.4 billion of balances or 7% are 'Technically Held'⁴. The remaining €1.5 billion or 27% remain 'Untreated' mainly due to a lack of customer engagement and/or customer unaffordability. That being said, we continue to collect cash from this cohort with approximately 30% of Untreated NPLs paying more than their contractual interest.

In terms of the next phase of the Bank's NPL Strategy, we are close to reaching the optimum 'Treated v Untreated' mix recognising we still encourage customers to work until us to find a long-term treatment. However, given the time elapsed and the increased regulatory focus on NPLs across the Eurozone, we will develop a value-maximising strategy for both cohorts as a means of making the Bank less risky and more capital efficient. To achieve this, through the course of 2017, we will assess various options available to us including Hold, Sale and Charge-Off. We will update the market on progress in a timely manner.

Regulatory Capital, Risk Weighted Assets and Dividends

At 31 December 2016, the Bank's Common Equity Tier 1 (CET1) capital ratio marginally decreased to 14.9% on a Fully Loaded Basis and marginally increased to 17.2% on a Transitional Basis. The Total Capital Ratio marginally increased to 16.3% on a Fully Loaded Basis and 18.9% on a Transitional Basis. The changes in capital ratios are primarily due to the reduction in the level of risk weighted assets offset by losses incurred in the year.

During 2016, the Single Supervisory Mechanism (SSM) has advised that the Bank's Supervisory Review Evaluation Process (SREP) Demand for 2017 is to maintain a Transitional CET 1 ratio at a minimum of level of 11.45% (including Pillar 2 Guidance of 2.25%).

In respect of Risk Weighted Assets ('RWAs'), and as previously guided, we remain extremely cautious on the final outcome of the European wide TRIM Programme (for both the Stage 1 Bilateral and Stage 2 Harmonisation phases). In respect of Stage 1, the Bank is currently engaged in discussions with the SSM; whilst the final outcome remains to be determined, we have maintained 2016 year-end RWAs at the same position as the half-year as a preliminary prudent measure (after allowing for the impact of non-core deleveraging). As a result, this has led to an additional buffer included in the Bank's RWAs at 31 December 2016 of €0.6 billion. Whilst we have no clear line of sight to the results of Stage 1, based on both internal analysis and industry soundings, we are guiding the market to a further potential increase in credit risk weightings in the region of €1.3-€1.5 billion. The impact of the pan-European Stage 2 'Harmonisation Phase' is not yet known.

The TRIM Programme represents a significant headwind for all banks. However, to compensate, the Bank is now generating capital organically and remains well above its SREP CET1 Demand of 11.45% (including the Pillar 2 Guidance). We remain fully committed to our medium term target capital ratio of 11% CET 1 on a fully loaded basis and expect SREP requirements to reduce over time reflecting the de-risking of the business through the completion of deleveraging, profitability and the continued strengthening of the risk, governance and control framework.

Given the recent uncertainties created by the regulatory environment, in particular, in relation to the treatment of NPLs and RWA intensity, we will not be able to meet the target of a dividend from 2017 earnings. We remain committed to returning capital to shareholders and are guiding to dividend payments from 2018 earnings, in 2019.

Outlook

The banking industry is still going through a recovery and transition phase. It continues to be affected by a low interest environment and evolving regulatory requirements. In Ireland, high levels of NPLs and sub-optimal levels of housing supply continue to stifle credit growth. However, the economic backdrop for the Bank - particularly for the residential property market - is strongly positive notwithstanding the risks that Brexit and other geopolitical events may bring.

In summary, the Bank has made significant progress in 2016; it has improved its underlying profitability significantly and completed the multi-year Non-Core deleveraging programme of over €9 billion.  We are now firmly focussed on delivering sustainable commercial and profitable growth, and are confident of its future as a key player in the Irish financial services landscape.

Ends

For further information, please contact:
Investors and Analysts		Media
Eamonn Crowley Group Chief Financial Officer [e-mail] [phone]	Rajesh Manirajan Head of Investor Relations [e-mail] [phone]	Ray Gordon Gordon MRM [e-mail] [phone]

Note on forward-looking information:

This Announcement contains forward-looking statements, which are subject to risks and uncertainties because they relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Group or the industry in which it operates, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements referred to in this paragraph speak only as at the date of this Announcement. The Group undertakes no obligation to release publicly any revision or updates to these forward-looking statements to reflect future events, circumstances, unanticipated events, new information or otherwise except as required by law or by any appropriate regulatory authority.

---

¹ Calculated as Total Operating Expenses (excluding Bank Levy and Regulatory Charges, and Exceptional Items) as a percentage of Total Operating Income (excluding gain from sale of a share held in Visa Europe)

² Calculated as Total Operating Expenses (excluding Bank Levy and Regulatory Charges, and Exceptional Items) as a percentage of Total Operating Income (excluding gain from sale of a share held in Visa Europe of €29 million)

³ Calculated as Impairment Charge (excluding HPI Write-Backs) as a percentage of the average balance of Net Loans and Advances to Customers (including Assets Held For Sale)

⁴ These include loans pertaining to customers who have defaulted on another facility or NPLs that are on a probationary period waiting to be reclassified as 'Performing'.

 

END

 

 

MSCJRMBTMBBMTJR