Half-Year Results Commentary

27 July 2016 - 07:00

PERMANENT TSB GROUP HOLDINGS PLC

2016 INTERIM RESULTS FOR THE FIRST SIX MONTHS ENDED 30 JUNE 2016

Permanent TSB Group Holdings plc (the "Group") today reports its half year results.

 

 

Key Points:

 

·      Profit Before Exceptional Items and Tax of €117 million, an improvement of €116 million over H1 2015

·      Profit After Tax of €80 million (H1 2015: loss of €410 million) - first reported Post-Tax profit since 2007

·      Net Interest Margin (excluding ELG fees) increased by 31bps from 1.12% in 2015 to 1.43%

·      Cost Income Ratio¹ remains elevated at 87% due to Regulatory Cost pressure

·      Impairment write-back of €61 million, an improvement of €85 million on H1 2015

·      NPLs reduced further by €0.4 billion from December 2015 to €6.2 billion²

·      Fully Loaded CET1 ratio increased by 0.9% to 15.9%

·      New Mortgage Lending increased by 4% Year-on-Year (YoY) to €211 million

 

 

Jeremy Masding, Group Chief Executive, said:

 

"Having recapitalised the bank during 2015, the Group has moved to pre-and post-tax profitability and is generating capital for the first time since 2007.  This, I believe, positions us better to focus on our commercial agenda and to grow the business.

 

Of course there are challenges ahead. However, we remain as committed as ever to serving our customers and, to delivering attractive and sustainable returns to our shareholders by making the most of our key strengths."

Core Bank: Summary

The Core Bank's NIM (excluding ELG fees) increased to 1.76% for H1 2016 driven primarily by the continued reduction in Cost of Funds.

 

In the first half, we introduced a number of initiatives both to broaden and enhance our product offering and customer focus, and to refresh the brand.  We introduced a new mortgage proposition - the '3 in 1' mortgage. This has been well received by customers and contributed to new mortgage lending of €211 million in the first half, an increase of 4% YoY. In addition, we have recently introduced a series of very competitive fixed rate mortgages products which we believe are appropriate and offer excellent value to new customers.  We believe our new offering is competitive and will deliver profitable growth as credit conditions in the mortgage market normalise.

 

In June, we launched an innovative new current account product, the "Explore Account" which has performed strongly since launch.

Group: Operating Performance

NIM (excluding ELG fees) increased by 31bps from 1.12% in 2015 to 1.43% in the first half (Q2 NIM was 1.39%) primarily due to the reduction in the Cost of Funds which fell from 1.11% in 2015 to 0.75%.

 

During the first half, the Group increased its Wholesale Funding by €2 billion through secured funding transactions. Offsetting this was a decrease in System Funding of €2.1 billion, which now stands at 10% of Total Funding. As a result, and due to maturities of certain higher yielding Treasury Assets in the first half, the Group expects second half NIM to be lower.

 

The Group made a gain of €29 million from the sale of a share held in Visa Europe in the first half which is included in Other Operating Income.

 

Total Operating Expenses (excluding Regulatory Costs) increased by 7.5%, primarily due to a higher spend on certain regulatory and mandatory projects such as IFRS 9. These are not expected to be recurring over the medium term. Regulatory Costs increased by €19 million as a result of the recognition of contributions to the Single Resolution Fund (SRF) of €9 million and the Deposit Guarantee Scheme (DGS) of €10 million. We are anticipating potential increases in these costs (in particular, in the contribution to SRF) going forward.

The Irish Bank Levy of €27 million will be paid in October 2016. Excluding the Bank Levy, the Group expects Operating Expenses to be lower in the second half.

Cost Income Ratio³ for the first half was 87% compared to 86% in H1 2015. This is elevated mainly due to increased Regulatory Costs in the period. The Group remains committed to returning to an underlying cost base (excluding new Regulatory Costs) of between €260 and €270 million in the medium term.

 

Total Impairment Write-Backs for the first half were €61 million, an improvement of €85 million over H1 2015.  The Write-Backs include €26 million in relation to better underlying net performance, reflecting sustained loan cures. The Group expects an impairment charge in the second half arising from underlying performance. This is mainly due to the quantum of write-backs from loan cures moderating and the Group returning to a normalised impairment flow. The Group's medium term guidance of a cost of risk of 40 basis points or less remains unchanged. Impairment Write-Backs also include €35 million resulting from an adjustment to the House Price Inflation assumption. The Group continues to maintain a buffer ranging from 12-15% over and above the CSO Residential House Price Index.

 

The Group will continue to review all of its impairment provision modelling assumptions and parameters as part of the full year statutory reporting process later this year, having regard to the economic environment and, in particular, property prices in Ireland.

Group: Funding

Customer Deposits continue to be the major source of funding for the Group, representing 69% of Total Funding as of 30 June 2016. The Group increased its Wholesale Funding by €2 billion through secured funding transactions and decreased its System Funding by an equivalent amount, reflecting a return to a more normalised funding structure.

 Group: Asset Quality

As part of the Regulator's ongoing review of NPLs across Europe, the Group was required to reclassify certain loans (€0.5bn) as NPLs in accordance with an updated interpretation of the European Banking Authority's (EBA) definition of Non-Performing Exposures. These relate to Part Capital and Interest loans which are all in long term treatments. The comparative NPL balance at 31 December 2015 has also been restated accordingly to €6.6 billion from €6.1 billion. This reclassification has no impact on the Group's regulatory capital or impairment provisions and these loans are conforming to their restructure terms.

 

Aside from the above reclassification, NPLs declined by €0.4 billion in the first half to €6.2 billion. The reductions reflect ongoing progress with resolution strategies based around affordable and sustainable long term treatments to customers in financial difficulty, as well as the positive economic environment and the continued recovery in collateral values. NPLs that are in long term treatments now account for 56% of Total ROI Residential Mortgage NPLs.

Group: Capital

At the end of the first half, the Group's Transitional and Fully Loaded CET1 ratios were 17.9% and 15.9% respectively compared to 17.1% and 15.0% at December 2015. The increase is primarily attributable to profits earned in the period and a reduction in Risk Weighted Assets (RWAs). However, RWAs remain elevated mainly due to the continued retention of the residual non-core UK mortgage book.

 

The Group's SREP (Supervisory Review and Evaluation Process) requirement for 2016 set by the Single Supervisory Mechanism (SSM) is to maintain the CET 1 ratio at a minimum level of 11.45%, calculated on a Transitional Basis. The SREP requirement, which takes into account both quantitative and qualitative factors, is subject to annual review by the SSM.

Non-Core

The residual UK mortgage book of £2.3 billion remains non-core and our intention remains to exit this business fully subject to market appetite and appropriate pricing. In this respect, it is not possible to give a precise date for completing a transaction; in particular, in light of the UK's recent decision to leave the EU. We are in active negotiations with the relevant authorities in relation to our Restructuring Plan commitment to sell the portfolio, with a view to agreeing an optimal outcome for all parties concerned. We recently put in place long term GBP denominated funding covering the majority of these UK assets, thereby largely removing the impact of currency fluctuations in the medium term. We will continue to monitor the market with a view to selling the portfolio in a manner consistent with minimising capital dilution.

Group: Outlook

The Group has made significant progress and improved its profitability in the first half of 2016. The growth in the Irish economy provides a strong backdrop for the Group's future profitability. Nevertheless, challenges remain in the form of constrained mortgage market growth from limited housing supply, increasing Regulatory Costs and economic uncertainty caused by UK referendum outcome.

 

 

Please refer to Footnotes at end of  Announcement.

For further information, please contact:
Investors and Analysts		Media
Patricia Carroll Interim Group Chief Financial Officer [email protected] +353 1 669 5354	Rajesh Manirajan Head of Investor Relations [email protected] +353 1 669 5622	Ray Gordon Gordon MRM [email protected] +353 87 241 7373

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.