Commentary on 2022 Half-Year Report
27 July 2022
Permanent TSB Group Holdings plc ('the Bank')
Interim results for half year ended 30 June 2022
"We have reached another significant milestone on our transformation journey with the approval of the Competition & Consumer Protection Commission (CCPC) together with the Bank's shareholders to complete the acquisition of approximately €7.6bn of the Ulster Bank Retail, SME and Asset Finance business in the Republic of Ireland. While subject to regulatory approval, all parties are working towards completing the acquisition of the performing non-tracker residential mortgage business of Ulster Bank in Q4 2022 and it is currently anticipated that the acquisition of the 25 branches, Business Direct (micro-SME) and Lombard (Asset Finance) businesses will complete in Q1 2023, but in all cases no later than 30 June 2023.
We are continuing to attract tens of thousands of new customers to Permanent TSB, opening c.70k new deposit and current accounts throughout the first half of the year, an increase of c.130% when compared to the same period last year. Customers are also increasingly choosing our digital account opening process, with 69% of new current accounts being opened via the Permanent TSB app in June, evidence of the investment the Bank has made to further enhance digital services for customers.
The Bank delivered a strong performance in the first half of the year with significant growth across all three of our core lending product lines of mortgages, SME and term lending. Mortgage market share remains strong at c.16% with a very strong pipeline of activity following the introduction of our Green mortgage product and 20bps rate reduction on our four year fixed rate. Our continued expansion in the business banking market and partnership with the SBCI resulted in €70m SME lending in the first half of the year; a 67% increase on this time last year.
This progress is underpinned by investment in our brand and community partnerships, and earlier this year we announced our title sponsorship of both the Irish Olympic and Paralympic teams for the Paris 2024 Games and in doing so, becoming the first ever title sponsor to partner with both organisations in an Olympic cycle. We see our community ethos as a key differentiator for Permanent TSB and like us the Olympic and Paralympics are grounded in communities across the country, so this is a perfect partnership.
Eamonn Crowley, Chief Executive
Key Highlights HY 2022
Ø The Bank maintains a strong Capital position; regulatory CET1 ratio 16.1%, fully loaded CET1 capital ratio of 14.7%
Ø Underlying Loss Before Tax [1] of €2 million (HY21: Underlying Loss Before Tax of €4 million)
Ø Loss Before Tax of €36 million (HY21: Loss Before Tax of €9 million)
Ø Strong new lending of €1 billion; 22% higher compared to prior year
Ø New mortgage market share of 16.3% [2] , as compared to 17.5% at June 2021
Ø Total Income 7% higher year on year (YoY); Underlying Net Interest Margin [3] (NIM) of 1.74%, 2bps higher than prior year (see further comment)
Ø Underlying Operating Costs [4] of €189 million, €21m or 12% higher YoY as we accelerate our investment in customer services and product offerings
Ø Exceptional Costs of €34 million are €29 million higher than prior year, primarily relating to costs associated with the transaction to acquire a portion of Ulster Bank's Retail, SME and Asset Finance businesses from NatWest Group Plc and Ulster Bank DAC
Business Performance
The Bank has continued its strong business performance in the first half of the year with year on year growth in key product lines and a significant increase in new current account customers.
Total new lending of €1bn is 22% higher YoY. New mortgage lending of €0.9bn grew by 21% YoY while the market share of mortgage drawdowns remains strong at 16.3%. The Bank made two notable adjustments to its mortgage product offering in the first half of the year, the full benefits of which will materialise in the second half of the year and into 2023. Firstly, the Bank launched its inaugural Green mortgage product which offers discounts of 0.2% on five year fixed rates for both new and existing mortgages on homes with a Building Energy Rating of A1 to B3. Secondly, the Bank reduced the interest rate for new customers on its four year fixed rate products by 20bps to as low as 2.05%[5]. These changes highlight that the Bank is focussed on ensuring a competitive and attractive mortgage product offering to customers.
SME Lending of €70 million in the first half of 2022 reflects an increase of 67% on the prior period. Through partnerships with the SBCI and other support service providers, the Bank is significantly expanding its presence in Business Banking and is delivering on its strategic objective to provide real support to small businesses in communities throughout Ireland.
New consumer term lending of €50 million increased by 6% YoY as customers welcomed the removal of all Covid-19 restrictions in January of this year. Digital adoption continues to grow with 77% of new term lending drawdowns through our direct channels[6].
The Bank is a founding participant of the First Home Scheme, a joint venture between the Irish State and the Irish retail banking sector, which will see the Bank invest up to c. €55m into the scheme. The scheme is designed to help qualifying first time buyers' purchase their own home by bridging the affordability gap between their deposit and mortgage, and the price of their first home.
Ulster Bank Transaction & Customer Switching Activity and Supports
The Bank continues to work with NatWest and Ulster Bank DAC towards the acquisition of certain elements of the Ulster Bank Retail, SME and Asset Finance businesses in the Republic of Ireland. The Transaction remains subject to obtaining the required regulatory approvals, but has now received the approval of the Competition & Consumer Protection Commission (CCPC) and the Bank's shareholders at an Extraordinary General Meeting (EGM) held on 24th June with 99.9% voting in favour of the resolution.
The imminent exit of two competitors from the Irish market is resulting in a significant increase in new customers moving their banking relationship to the Bank. New current and deposit account openings in the first half of the year were c.70k, an increase of c.130% compared to the prior period.
This growth has been supported by the launch last year of our Digital Current Account which enables new and existing customers to open a new current account through the App in less than ten minutes. 69% of new current accounts in June were opened digitally and an enhanced version of the App will go live later this year offering customers the option of opening a Joint Current Account.
Permanent TSB has also launched a dedicated online hub to support customers who need to switch from another financial institution; www.permanenttsb.ie/movingbankhub . The hub allows customers to identify what product combinations are relevant to their individual needs and circumstances. Once identified, customers are then provided with step by step guidance to support them in their switching journey.
Staff from Permanent TSB are now present in over forty Ulster Bank branches and Permanent TSB has also launched a number of mobile and pop-up branches in various parts of the country. These various initiatives are set up to support customers in opening an account with Permanent TSB and to begin their switching journey.
Permanent TSB is also currently undergoing a significant recruitment drive to ensure the Bank has adequate capacity and capability to manage the increase in demand from new current and deposit account customers, as well as to safely integrate c. €7.6 billion of mortgage home loans, business loans and credit facilities into our business over the coming months, while continuing to serve and support our existing customers. Permanent TSB now has over 700 branch customer advisors and 230 colleagues in our customer contact centre. We have also recently recruited a mixture of permanent and temporary staff totalling c.550 new colleagues across our branch, contact centre, operations, fraud, AML and digital teams to support the increase in customer demand.
Financial Performance
The Irish economy and operating environment for banks has remained positive in the first half of the year, notwithstanding the near-term headwinds which are beginning to manifest in the form of high levels of inflation driven primarily by rising energy and fuel costs.
The Bank delivered an Operating Loss of €11 million (HY2021: Operating Loss €1 million) and a Loss before Tax of €36 million (HY2021: Loss before Tax of €9 million).
Net Interest Income increased by 2% during the year as additional interest income from net loan book growth offset higher costs of holding excess liquidity and the reduced Non Performing Loan income following the €0.4bn deleveraging transaction completed in Q4'21. The H1'22 exit NIM of 1.41% has reduced by 9 basis points from 1.50% in the prior year, primarily as a result of the higher costs from holding excess liquidity. The underlying NIM, excluding the cost of excess liquidity is 1.74%. The Bank expects the NIM to be in the low 140bps throughout 2022, as we continue to hold excess liquidity which will be required to fund the acquisition of the agreed loan portfolios from Ulster Bank DAC, expected later this year.
Fees and Commission Income of €19 million was 27% higher than the prior year as transactional activity continued to recover following the removal of all Covid-19 restrictions at the start of the year.
Underlying Operating Costs of €189 million are 12% higher than the prior year, as the acceleration of investment drives higher costs including a higher depreciation charge of €24 million, +4% YoY as we pay for the investment in the business.
A €9m Impairment release reflects the continued growth in house prices YTD whilst maintaining a prudent level of provisions in light of high levels of inflation.
The Bank reports an Exceptional Costs of €34 million at 30 June 2022. The exceptional cost is primarily driven by costs associated with the transaction to acquire a portion of Ulster Bank's Retail and SME businesses from NatWest of €35m, together with some additional restructuring costs and non-Core items of €6m. This is offset by €7 million of gains from the release of provisions held in relation to legacy deleveraging transactions.
Balance Sheet remains robust with strong capital, funding and liquidity levels
The Bank's funding position remains strong with all funding and liquidity metrics well above regulatory requirements. Total Customer Deposits of €20 billion at 30 June 2022 are €0.9 billion higher than at 31 December 2021 reflecting a 13% increase in current account balances to €8.0 billion. The loan to deposit ratio of 72% at 30 June 2022 provides the Bank with a strong liquidity position and significant potential to lend.
The Total Performing Loan Book of €14.1 billion at 30 June 2022, is €0.2bn higher than the Total Performing Loan Book at 31 December 2021 with new lending offsetting repayments and redemptions. The Residential Home Loan book has grown by 5% YoY.
Non-Performing Loans of €771 million at 30 June 2022 are €46m or 6% lower when compared to the balance at 31 December 2021 with organic cures and reductions offsetting new default flow.
In May 2022, the Bank issued €300m of Senior Preferred notes at a fixed coupon of 5.3%. The Bank remains above management and regulatory MREL requirements.
Capital
The Bank's Common Equity Tier 1 (CET1) ratio on a fully loaded basis remains strong at 14.7% at 30 June 2022, a reduction of 40bps when compared with the CET1 Pro forma ratio on a fully loaded basis at 31 December 2021, primarily reflecting the YTD Income Statement loss.
The CET1 ratio on a transitional basis of 16.1% at 30 June 2022 reduced by 1.3% compared to the CET1 Pro forma ratio on a transitional basis of 17.4% at 31 December 2021 due to the YTD Income Statement loss and continued phase-in of transitional filters; regulatory requirement for CET1 on a transitional basis is currently 8.94%[7].
The Total Capital ratio on a transitional basis was 21.2% at 30 June 2022; regulatory requirement for Total Capital on a transitional basis is currently 13.95%7.
The table below details the Bank's capital ratios at 30 June 2022 and compares them to the capital ratios at 31 December 2021.
|
Capital Ratios (%) |
(Reported) June 2022 |
(Reported) December 2021 |
(Pro Forma) December 2021 |
|
CET1 (Fully Loaded) |
14.7% |
14.7% |
15.1% |
|
CET1 (Transitional) |
16.1% |
16.9% |
17.4% |
|
Total Capital (Transitional) |
21.2% |
21.8% |
22.4% |
|
Total Capital (Fully Loaded) |
19.7% |
19.5% |
20.1% |
2022 Outlook
The beginning of 2022 saw the welcomed removal of all Covid-19 restrictions which helped allow transactional activity and loan demand return to pre-pandemic levels. Notwithstanding the impact to consumers from the geo-political events in Ukraine, primarily in the form of higher than expected levels of inflation, the Bank is well positioned to continue its strong new lending performance as we move into the second half of the year. There is a strong pipeline of activity across each of our core product lines and demand remains strong.
The mortgage market is expected to grow from €10.5bn in 2021 to c. €13bn in 2022, supported by a significant increase year on year in the Switcher market as customers seek to lock-in lower rates ahead of expected interest rate increases. The growth in the mortgage market and our ability to meet our ambition in the SME market will see new lending volumes this year coming in ahead of the prior year.
Net Interest Income will be higher than the prior year as we integrate the Ulster Bank mortgage assets in Q4'22, however NIM will remain in the low 140 basis points due to the high levels of excess liquidity required to fund the Transaction.
Total Operating Costs in 2022 are expected to be c. 14% higher than 2021, slightly higher than previous guidance (12%), as we continue with the accelerated investment to enhance our digital offering while also accommodating inflationary pressures. The Bank remains committed to delivering underlying cost savings in the medium term in order to help offset higher depreciation arising from the increased investment.
Demand continues to outweigh supply in the housing market which will see house prices continue to grow over the remainder of the year, but at a slower rate than the prior year. The main headwinds, from a macro-economic environment point of view, is rising inflation and the impact it is having on the cost of living for customers. As such, the Bank will keep the Expected Credit Loss under constant review throughout the remainder of the year. It is expected that the full year impairment charge release will be broadly in line with the €9m recognised in these Interim Results.
On the expectation that the acquisition of Ulster Bank DAC retail business completes in quarter four 2022, the Bank will have exceptional accounting gains which will increase the overall profitability of the Bank and positively contribute to the Bank's capital position. Capital remains strong and having assessed a range of scenarios, the CET1 ratio will remain well above the Bank's minimum regulatory requirements.
The Bank remains positively geared towards interest rate increases. The interest rate on the Residential Tracker portfolio, totalling c. €5.7bn at 30 June 2022, will increase by 50 basis points in August following the ECB decision on 21st July. On an annualised basis and assuming no repayment or redemptions, this equates to an additional c. €28m in interest income.
- Ends -
For Further Information Please Contact:
Denis McGoldrick Leontia Fannin
Investor Relations Manager Head of Corporate Affairs and Communications
Email: Denis.McGoldrick@Permanenttsb.ie Email: Leontia.Fannin@Permanenttsb.ie
Phone: +353 87 928 5645 Phone: +353 87 973 3143
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 Bank 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 Bank 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] Underlying Profit or Loss before Tax is the Profit or Loss before Exceptional Items and Tax
[2] Based on BPFI data as at 30 June 2022
[3] Underlying Net Interest Margin (NIM) is the reported Exit NIM less the high cost of holding excess liquidity (c.33bps)
[4] Underlying Operating Costs are Total Operating Costs per the financial statements less a provision for legal, compliance and other costs shown in Exceptional Items for ease of comparison (see further details in the Financial Performance)
[5] For customers with a LTV <80%
[6] Direct channels include Desktop, App and Voice through Open24
[7] Regulatory requirements for both CET1 and Total Capital on a transitional basis excludes P2G and Combined Buffers
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