Commentary on 2023 Half-Year Report
02 August 2023
Permanent TSB Group Holdings plc ('the Bank')
Interim results for half year ended 30 June 2023
"We are very pleased to have successfully completed our transformational acquisition of approximately €6.75bn of the Ulster Bank Retail, SME, and Asset Finance business in the Republic of Ireland. The final migration of the c. €0.5bn asset finance business took place in mid-July and I want to once again warmly welcome the approximately 88,000 new mortgage and business customers and over 330 new colleagues who have joined us from Ulster Bank over the course of this acquisition.
The Bank has made enormous progress over the past two years - with greater scale and diversification, an enhanced digital offering, a larger branch network, a bigger team of highly skilled and committed colleagues, and many more customers than before.
Our first half performance shows real momentum in our business as we return to sustainable profitability, evidenced by our underlying profit before tax of €86 million. We continued to support our customers with new lending of €1.4bn; an increase of 36% year-on-year ('YoY').
Despite a challenging economic backdrop, we look forward to the remainder of the year with confidence. We are committed to supporting our customers in the face of cost of living pressures. We are and we will deliver on our ambition to provide real competition in the Irish retail and SME banking market."
Eamonn Crowley, Chief Executive
Key Highlights H1 2023
§ The Bank maintains a strong Capital position; regulatory CET1 ratio of 14.7%
§ Profit Before Tax of €26 million, Underlying Profit Before Tax[1] of €86 million
§ Total Gross Loan book of €21.1bn; +42% YoY and +7% YTD
§ Total Customer Deposits of €22.6bn; +13% YoY and +4% YTD
§ Strong new lending of €1.4 billion; 36% higher compared to prior year
§ New mortgage market share of 23.1%[2], compares to 16.3% at June 2022
§ Total Income 81% higher year on year (YoY); Net Interest Margin (NIM) of 2.29%
§ Cost/Income ratio[3] of 63%, 29% lower YoY; Underlying Operating Expenses[4] of €204 million, 24% higher YoY as we take on new businesses, new staff and accelerate our investment in customer services and product offerings
§ Successfully issued two MREL eligible senior debt bonds totalling €1.15bn; FY23 issuance schedule completed
§ The Irish State and NatWest sold a 10% shareholding bringing the free float shareholding to 31%
Business Performance
The Bank reports strong business performance for the first half of the year, with total new mortgage lending of €1.3 billion, 41% higher YoY, with market share of mortgage drawdowns growing to 23.1%. We are continuing to support a more sustainable economy with 28% of drawdowns into our Green mortgage products which were launched in Q2'22.
New SME Lending of €60 million in the first half of 2023 was 14% lower YoY, however, there is a strong pipeline of SME activity as we move into the second half of the year. Supported by the migration of the Ulster Bank micro-SME book in February, the total SME loan book grew by €0.2 billion to €0.5 billion at 30 June 2023. With the migration of the Asset Finance business in July 2023, the total SME book is now c. €1bn.
New Consumer Term Lending pay-outs of €60 million increased by 20% YoY, supported by our recent marketing campaign which focuses on our attractive car and home improvement loan propositions. Digital adoption continues to grow with 80% of new term lending drawdowns through our direct channels[5].
Sustainability
Sustainability is a strategic priority for our business and during the first half of 2023, we have continued to make progress across the four pillars of our Sustainability Strategy. We are continuing to support our customers in navigating the transition to a low carbon economy with c. €365 million in green lending drawn down through the Bank's Green Mortgage offering during H1, accounting for 28% of new Mortgage lending.
We conducted our first ESG Risk Rating with Sustainalytics and were awarded a 'Low' risk rating, recognising the progress we have made in recent years. In addition, we completed a programme of work to understand our carbon impact across Scope 1, 2 and 3 (including our financed emissions). We are committed to disclosing transparently and in early July, we were pleased to issue our first Task Force on Climate-related Financial Disclosures Report (TCFD) to the market, demonstrating the progress we are making on integrating consideration for climate-related and environmental risk into all areas of our business.
Financial Performance
The Bank delivered a strong Underlying Profit of €86 million (H1'22: Underlying Loss €2 million) and a Profit before Tax of €26 million (H1'22: Loss before Tax of €36 million).
Net Interest Income of €298 million has increased by 92% year-on-year, driven primarily by; higher average customer loan volumes due to the acquisition of the Ulster Bank's assets a strong underlying business performance, by improved returns from excess liquidity which had been a cost until recently, and by the changed interest rate environment. NIM% of 2.29%, has increased by 88bps year-on-year, and 75bps from FY'22 exit NIM of 1.54%.
Fees and Commission Income of €23 million was 21% higher than the prior year, as a result of a larger customer base with strong transactional activity and increased Current Account volumes.
Total Operating Expenses of €228 million are 21% higher than the prior year, as we operate a larger business with more staff, and a larger distribution capability. We are also serving a larger customer base while we continue to invest in the business, as we manage inflationary pressures. We are revising our full year guidance regarding Operating Expenses to take account of an improved Cost/Income Ratio despite an increase in costs; expectations are now that total Operating Expenses will be c. 25% higher YoY while the Cost/Income ratio will be <65%.
Credit quality remains robust despite the backdrop of inflation and higher interest rates. There was a net impairment charge of €9 million which reflects the slight reduction in the House Price Index observed during the first half of the year.
The Bank reports an Exceptional Item charge of €60 million at 30 June 2023 which is driven by the Ulster Bank transaction costs together with the accounting treatment of expected credit losses on acquired assets.
Balance Sheet
The Bank's funding position remains strong, with all funding and liquidity metrics well above regulatory requirements. Customer Deposits of €22.6 billion at 30 June 2023 are €0.9 billion higher than at 31 December 2022, reflecting a 6% increase in current account balances to €9.5 billion. The loan to deposit ratio of 92% at 30 June 2023 will allow the Bank to continue to support customers through new lending. 71% of all customer deposits are insured. The Bank continues to have strong funding and liquidity ratios with an LCR of 186% and NSFR of 159% at H1 2023. The majority of excess liquidity of €2.7bn is deposited with the Central Bank of Ireland.
The Performing Loan Book of €20.4 billion at 30 June 2023 is €1.3 billion higher than the Total Performing Loan Book at 31 December 2022, following the migration of the SME Ulster Bank in February 2023 together with the migration of the second cohort of performing non-tracker mortgage loans in May 2023, and strong new lending performance in the first half of the year.
Non-Performing Loans of €0.7bn with an NPL ratio of 3.3% at 30 June 2023 in line with December 2022.
Capital
The Bank's Risk Weighted Assets ('RWAs') have increased by €0.6 billion from December 2022, driven by the Ulster Bank SME and Mortgage asset migrations in H1'23 and organic loan book growth. The CET1 ratio on a transitional basis of 14.7% at 30 June 2023 reduced by c. 150 bps compared to the CET1 of 16.2% at 31 December 2022. The regulatory requirement for CET1 on a transitional basis is currently 9.44%[6], +50bps compared to December 2022 due to the initial phase-in of the Counter Cyclical Buffer (CCyB).
The Bank's Common Equity Tier 1 (CET1) ratio on a fully loaded basis remains strong at 14.4% at 30 June 2023, a decrease of 80 bps since 31 December 2022, primarily reflecting the impact of Ulster Bank SME and Mortgage asset migrations in H1'23.
The Total Capital ratio on a transitional basis was 20.6% at 30 June 2023. Regulatory requirement for Total Capital on a transitional basis is currently 14.45%, +50bps compared to December 2022 due to the initial phase-in of the Counter Cyclical Buffer (CCyB).
On a Pro forma basis, including the €0.5bn Asset Finance book which migrated in July 2023, together with the day one expected credit loss, the Bank's CET1% on a fully loaded basis is c. 13.8%, see table of Capital ratios below.
|
Capital Ratios (%) |
(Reported) June 2023 |
(Pro Forma)[7] June 2023 |
(Reported) December 2022 |
|
CET1 (Transitional) |
14.7% |
14.0% |
16.2% |
|
CET1 (Fully Loaded) |
14.4% |
13.8% |
15.2% |
|
Total Capital (Transitional) |
20.6% |
19.7% |
22.3% |
|
Total Capital (Fully Loaded) |
20.3% |
19.4% |
21.3% |
|
Leverage Ratio (Fully Loaded)[8] |
7.0% |
6.8% |
7.7% |
2023 Outlook
The Bank is in a strong position as we move into the second half of the year with good momentum in our core product lines.
The mortgage market is undergoing a significant adjustment as switching activity reduces materially. Latest expectations are that the 2023 market size could be c. €12.5bn, a reduction of c. 11% YoY. However, the underlying market (excluding switcher proportion) is expected to grow by c. 10% YoY.
Total Income is now expected to be c. €680m in FY23, c. 65% higher than the prior year and c. 5% higher than the previous guidance of c. €650m as the interest rate trajectory moves higher than previously assumed; ECB deposit rate of 3.75% assumed at December 2023.
The Cost/Income ratio is expected to improve to <65% from the previously guided <70% for the full year. The Bank remains committed to rigorously managing the cost base to ensure a continued reduction in the Cost/Income ratio over the medium term.
Total Operating Costs in 2023 are expected to be c. 25% higher than 2022, as we operate new businesses, absorb the previously guided higher depreciation charges and invest in key strategic and regulatory initiatives which will support the growing business.
We continue to monitor asset quality closely, particularly in light of the higher interest rate environment and 'cost of living' challenges for customers. Subject to there being no material deterioration in the operating environment, the cost of risk for 2023 is expected to be not more than ten basis points, in line with previous guidance.
Capital remains strong and having assessed a range of scenarios, the CET1 ratio will remain well above the Bank's minimum regulatory requirement.
- Ends -
For Further Information Please Contact:
Denis McGoldrick Leontia Fannin
Investor Relations Senior 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 before Tax is the Profit before Exceptional and other non-recurring Items and Tax
[2] Based on BPFI data as at 30 June 2023
[3] Cost Income ratio calculated as Operating Expenses (excl. Regulatory Charges and Exceptional Items) divided by Total Operating Income
[4] Underlying Operating Expenses are Total Operating Costs per the financial statements less regulatory charges and a provision for legal, compliance and other costs shown in Exceptional Items for ease of comparison (see further details in the Financial Performance)
[5] Direct channels include Desktop, App and Voice through Open24
[6] Regulatory requirements for both CET1 and Total Capital on a transitional basis excludes P2G
[7] Pro forma capital ratios include the impact from the Ulster Bank Asset Finance migration, completed in July 2023
[8] The Leverage ratio is calculated by dividing Tier 1 capital by gross balance sheet exposures (total assets and off balance sheet exposures)
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