Commentary on 2021 Half-Year Report

28 July 2021

Permanent TSB Group Holdings plc ('the Bank')

We are very pleased to have recently announced a Memorandum of Understanding with Ulster Bank to acquire certain elements of the Ulster Bank Retail and SME business in the Republic of Ireland. This potential transaction complements our growth strategy, supports the investments we are making in the transformation of our in-branch and digital banking services and will accelerate the delivery of Permanent TSB's ambition of becoming Ireland's best personal and small business bank.

We are conscious that there is still significant work to be done to agree legally binding agreements later this year, but we are optimistic that we can work with all parties to create an enlarged Permanent TSB with an increased national footprint that will provide enhanced products and services to our present and future customers. We welcome all Ulster Bank customers to Permanent TSB, whether or not their loan is transferring as part of this potential transaction, and we look forward to supporting them with their banking needs.

The performance in the first half of 2021 has seen the Bank competing very strongly, bringing real innovation to the market, introducing new customer offerings and attracting new customers to the Bank. We saw a strong rebound in activity in the second half of 2020 and have built further on this momentum in the first half of 2021, evident from the significant increase in our new mortgage market share, which now stands at 17.5%.

We are making great progress on our digital transformation programme with a further €50 million investment in our technology infrastructure and digital capability, launched our new market leading digital current account and formed partnerships with both global service integration providers and Irish Fintechs. All of this complements our commitment to maintaining our Branch network and supporting communities nationwide, enabling us to offer customers a seamless digital experience online as well as personal support and advice in our 76 branches nationwide.

Eamonn Crowley, Chief Executive

Key Highlights H1 2021:

·     Strong new lending of €0.9 billion YTD; 43% higher compared to H1'20. Increased new mortgage market share to 17.5%^[1], up from 15.2% at June 2020

·     Net Interest Margin (NIM) of 1.50%, 23 basis points lower than the 2020 exit NIM, primarily as a result of higher levels of excess liquid assets at negative yields and rate reductions for new and existing customers

·     Total costs of €168 million are c. €6m higher year-on-year (YoY) as the cost of investments drives a higher depreciation charge

·     Customer deposits of €18.5 billion, increased 3% (€0.5 billion) in the first half of the year

·     Non-performing loans (NPLs) of €1.0 billion at 30 June 2021 are c.€85 million lower than the balance reported at December 2020; the NPL Ratio has reduced to 7.0%

·     The Bank maintains a strong capital position; fully loaded CET1 capital ratio of 15.3%, an increase of 20 basis points on December 2020 CET1 ratio of 15.1%

Business Performance

New mortgage lending of €0.8 billion grew by 45% YoY, outperforming the mortgage market which grew by 26%. Market share of mortgage drawdowns grew from 15.3% at December 2020 to 17.5% at June 2021. Whilst the mortgage market in Ireland is estimated to grow 19% from €8.4 billion in 2020 to c. €10 billion[2] in 2021, it remains competitive.

The Bank introduced a new 4-year fixed rate mortgage product for new personal customers with rates as low as 2.25%. This new product broadens choice for customers by offering an alternative to the cashback option. The Bank will also continue to offer the cashback at drawdown feature for mortgage customers. We continue to manage our offering carefully by maintaining price discipline and credit underwriting standards.

SME Lending of €42 million in the first half of 2021 reflects an increase of 68% from the prior period. We continue to build on our SME service offering through a number of partnerships including; participation in the SBCI Future Growth Loan Scheme, a partnership with Bibby Financial Services Ireland to offer invoice finance services for business banking customers, and a partnership with Digital Business Ireland supporting SME's to transition their businesses online. We have recently announced a further expansion of our Business Banking payments offering, partnering with Worldpay from FIS for the provision of Merchant Solutions.

Significant progress has been made on the Bank's Digital Transformation journey in the first half of this year. The Bank has invested €100 million in technology and digital capability over recent years, delivering an upgrade of the Bank's core platforms, increasing security for customers through the introduction of Secure Customer Authentication, integrating a new API platform to enable open banking, and significant improvements to digital services via the Bank's mobile App and web portal.

In April, the Bank announced a further €50 million investment in technology infrastructure and digital capability which will allow the Bank prepare for a significant expansion of customers and services over the coming years and bring an enhanced digital experience for its customers. Partnerships are a key feature of our Digital Transformation Programme, including our partnership with EY and global service integration providers Infosys and Finacle, which has accelerated the development of best in class digital services for customers including current account opening via the Bank's App, which launched in May.

To support the delivery of the Bank's Strategy, we recently announced the recruitment of 180 new positions across both senior and graduate level in key growth areas, including; Technology, Business Banking, Risk Management and Data Analytics. These new positions will support the rollout of the next phase of the Bank's digital and SME growth strategy, as we prepare for a significant expansion of personal and business customers and services over the coming years.

The Bank also recently announced a partnership with Irish Fintech Credit Logic, which will see the Bank provide a new digital application platform for mortgage applicants. This partnership with Credit Logic will allow our customers to complete their entire mortgage application process online through a special App designed for exceptional ease of use and security. This new online based mortgage application service will launch later this year.

Responsible and sustainable business also continues to be a key area of focus. We conducted the Bank's first materiality assessment to inform the next stage of our Sustainability Strategy and we also recently signed Business in the Community Ireland's Low Carbon Pledge, joining 61 of Ireland's leading businesses in committing to setting new climate action goals. Through the pledge we have committed to setting science based carbon emission reduction targets by 2024. This includes measuring and reducing our entire carbon footprint (Scope 1, 2 and 3) in line with the Paris agreement.

In June of this year, the Bank was awarded the Guaranteed Irish symbol for its contribution to local communities across the country and commitment to Irish provenance and local employment. Evolving our culture for the better of our customers and communities continues to be a key area of focus.

Income

Net interest income decreased by 11% in the first half of 2021, when compared to the same period in 2020. This reflects lower income post the performing loan sale transaction (Glenbeigh II) in quarter four 2020, lower treasury income as a result of the low interest rate environment and lower income on the residential portfolio following the rate changes announced in quarter three 2020.

The net interest margin of 1.50% includes a 22 basis points cost related to excess liquidity due to the proceeds received from the performing loan sale transaction (Glenbeigh II) and elevated customer deposits. While the loan asset spread remains stable, the Bank expects the NIM to remain in the low 150bps for the remainder of 2021; as we continue to lend, actively manage deposit costs while holding higher levels of excess liquidity.

Fees and commission income of €15 million was broadly in line with the prior year, re-entering Covid-19 Government restrictions in January 2021 had an impact on transactional activity however since then fees and commissions have returned to pre Covid-19 levels.

Costs

The Bank continues to maintain a key focus on cost management while investing in transformation and absorbing cost inflation. Operating expenses are €6m higher than the prior year as we accelerate investment in our digital capability. We continue to make underlying savings in administrative expenses in order to offset higher depreciation & amortisation. The voluntary redundancy scheme which closed in quarter one 2021 has contributed to a reduction of c. 200 FTE when compared to H1 2020 and we expect c. 100 staff exits under the voluntary redundancy scheme in H2 2021 and into Q1 2022.

Balance Sheet

Customer deposits of €18.5 billion at 30 June 2021 are €0.5 billion higher than 31 December 2020, reflecting an increase in current accounts to €6.4 billion. The loan to deposit ratio of 77% at the end of June 2021 provides the Bank with a strong liquidity position and significant potential to lend.

The total performing loan book of €13.8 billion at 30 June 2021, is in line with the total performing loan book at 31 December 2020 with new business being offset by repayments and redemptions. The Residential Home Loan book has grown 2% YoY as the pace of new lending exceeds the repayments on the book.

Non-performing loans of €1.0 billion at 30 June 2021 are c. €0.1 billion lower than balances at 31 December 2020, with organic cures being higher than new defaults in the period. We continue to take a prudent approach to provisioning, a small impairment charge of €3 million has been recognised in the first half of the year while provision coverage ratios have been maintained at the 31 December 2020 levels. Underlying asset quality remains satisfactory, the full year loan loss outcome will be dependent on key macroeconomic indicators. The house price index has performed well to date and unemployment will be reviewed post the further opening of the economy and the removal of government supports. The labour market continues to recover from the impacts of Covid-19.

Capital

The Common Equity Tier 1 (CET 1) ratio on a fully loaded basis increased by 20 basis points to 15.3% at 30 June 2021 compared to 15.1% at 31 December 2020. The movement reflects the benefits from prudential add backs on intangible assets.

The CET1 ratio on a transitional basis of 17.4% at 30 June 2021 reduced from 18.1% at 31 December 2020, regulatory requirement for CET1 on a transitional basis is currently 8.94%[3]. The Total Capital ratio on a transitional basis was 22.3% at the end of June 2021, regulatory requirement for Total Capital on a transitional basis is currently 13.95%3.

Capital remains strong and having assessed a range of scenarios, the CET1 ratio will remain above the Bank's minimum regulatory requirements.

Potential Transaction envisages Permanent TSB acquiring c. €7.6 billion of assets from Ulster Bank

Memorandum of Understanding (MOU) Perimeter

The MOU details that both parties' to the potential transaction intend to work together on the potential acquisition by Permanent TSB of circa €7.6 billion of assets from the following parts of the Ulster Bank business;

·     The performing non-tracker Mortgage book of Ulster Bank;

·     The performing Micro-SME/Business Direct ("Business Direct") loan book of Ulster Bank;

·     The Lombard Asset Finance loan business of Ulster Bank;

·     25 branch locations in Ulster Bank's branch network

It is proposed that circa 400 to 500 Ulster Bank employees, who are wholly or mainly assigned to the retail and SME perimeter that is being acquired, will transfer to Permanent TSB.

As part of the consideration for the perimeter transferring to Permanent TSB, NatWest will become a shareholder with up to 20% of the enlarged share capital of PTSB Holdings, together with PTSB Holdings paying NatWest an additional cash consideration.

The transaction is expected to be accretive to RoTE and PTSB Holdings would maintain a long-term pro forma Management CET1 Ratio of >14%.

At this stage, and subject to regulatory engagement, PTSB Holdings does not envisage that it will require additional new equity capital to complete the Potential Transaction.

The Bank will work with NatWest over the next number of months with a view to entering into legally binding agreements in Quarter 4, 2021. Subject to legally binding agreements being put in place and subject to receiving all required regulatory approvals, it is envisaged that the transfer of the business will take place within the next 12 to 18 months. 

2021 Outlook

Business activity remains strong, positioning the Bank well moving into the second half of the year. Market share of mortgage applications and drawdowns are higher than for the same period last year, while approvals are also significantly ahead leading to a strong pipeline of business, we expect new lending volumes for this year to be ahead of 2020 and 2019 volumes.

NIM is expected to remain in the low 150 basis points due to retaining surplus liquidity with negative yields on excess liquid assets, together with the lower reinvestment rates on treasury assets and continued price competition in the mortgage market.

The Bank is committed to supporting its customers and colleagues as they adapt to new ways in which they choose to interact with us, both as a result of the pandemic and the advancement in digital options for customers. As such, total operating expenses for 2021 are expected to be c.3% higher than the prior year as we accelerate the expenditure to further enhance our digital offerings and streamline sales and service processes. The Bank is committed to continue to deliver cost savings in the medium term to help pay for investment.

The current dynamics in the Irish housing market, which sees demand significantly outweighing supply, suggests that house prices will continue to increase in the short-term. As a result, the Bank will keep the Expected Credit Loss under constant review throughout the year. With 97% of the Bank's assets being secured residential lending, it is not expected that the 2021 impairment charge will be material.

Capital remains strong and having assessed a range of scenarios, the CET1 ratio will remain well above the Bank's minimum regulatory requirements.

-   Ends -

For Further Information Please Contact:

Nicola O Brien                                                                   Leontia Fannin

Head of Investor Relations                                              Head of Corporate Affairs and Communications

Email: [email protected]                       Email: [email protected] 

Phone: +353 87 148 2275                                                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.