Trading Statement

10 November 2016 07:00

PERMANENT TSB GROUP HOLDINGS PLC

TRADING UPDATE FOR THE THIRD QUARTER ENDED 30 SEPTEMBER 2016

Permanent TSB Group Holdings plc (the "Group") today reports its trading update.

The Group continues to trade in line with expectations and has been profitable for Q3.

Key Points 

· New mortgage lending drawdowns increased by 12% on a year-on-year (yoy) basis

· Group NIM (excluding ELG fees) improved to 1.44% (Core Bank: 1.71%)

· Group Operating Expenses trending in line with previous guidance

· Impairments trending in line with previous guidance

· €500 million of five year Residential Mortgage Backed Securities (RMBS) placed at a favourable rate

· Group Fully Loaded CET1 ratio increased to 16.7%

· Sale of the residual non-core UK loan book agreed

Trading

The Group continues to acquire customers through its new innovative "Explore" current account and continues to focus on maintaining its deposit base. The Group recently implemented rate changes in the Retail Deposit book, lowering shorter-term rates and raising longer-term rates marginally.

The Group introduced a series of competitive fixed rate mortgage products in Q3. The Group also launched a mortgage campaign "Mortgages To Your Door" that will build on the success of our extended "3-in-1" offer. Mortgage drawdowns are 12% higher to the end of Q3 on a yoy basis in line with the market, noting the overall mortgage market size still remains below normalised levels.

However, the constrained supply of housing in Ireland continues to drive competition in the market which is particularly evident in active pricing and proposition management by incumbent banks. That said, the Group continues to offer a range of competitive products and propositions whilst maintaining a prudent approach to underwriting.

The Group launched a market leading end-to-end online personal loan platform during the quarter. The platform directly addresses our customers' desire for convenient access to lending through an online channel where existing current account customers can access a personal loan in under 15 minutes.

Operating Performance

NIM (Excluding ELG fees) increased to 1.44% in Q3 2016 (1.43% H1 2016), ahead of guidance for the second half primarily due to early redemptions of NAMA bonds and a continued reduction in deposit costs. Asset yields were broadly stable in Q3. Market blended retail deposit rates reduced further and our premium over the market stood at approximately 15basis points[1] at 30 September 2016. We remain focused on reducing this premium to 5 basis points while managing the trade-off between the cost and deposit balance attrition.

As announced on 27 October 2016, the Group has agreed the sale of the residual non-core UK loan book and expects the transaction to complete by the year end. The sale achieves our aim as set out at the time of our capital raise in 2015 of simplifying the Group to focus on Irish retail and SME banking; as a consequence, the Group will equal the Core Bank going forward.

As a result of the agreed sale and the Q3 NIM performance as outlined above, we now expect the Group NIM to be marginally higher in the second half compared to the first half of the year.

In line with previous guidance, Total Operating Expenses (Excluding Regulatory Costs) are on track to be lower for the second half of the year when compared with the first half. 

Regulatory Costs continue to be disproportionate to the size of the Group and even more so post-the sale of the residual non-core UK loan book. The Group paid €27 million in respect of the Bank Levy in October and €10 million in respect of the contribution to the Deposit Guarantee Scheme in November. The Bank Levy for 2017 and 2018 is expected to be approximately €23 million based on the methodology outlined in the recently published Finance Bill 2016. The level of contributions to the Single Resolution Fund and the Deposit Guarantee Scheme for future years remains unconfirmed at this stage. That said, it is likely since the 2015 capital raise, new Regulatory Costs (including the Bank Levy) will have increased the Group's 2018 targeted cost base by over 20%.

The underlying Impairment trend in Q3 was consistent with expectations. In relation to House Price Inflation (HPI) adjustments, we note that house prices have increased by 7.2%[2] nationally in the year to August 2016. We continue to reiterate our guidance of a write-back of approximately €85 million for the full year 2016 upon updating our current HPI assumption (€35 million was written back in the first half). In total, we expect a marginal net write-back in the second half.

Balance Sheet

Deposits continue to be the major source of funding for the Group, representing approximately 70% of total funding. Irish Retail Deposits (including Current Accounts) represent over 56%. The Group recently increased longer-term retail deposits rates and reduced short-term retail deposits rates, in order to focus on extending the maturity profile of our Retail Deposit base to strengthen the balance sheet.

In addition, we continue to diversify our funding mix. In September, the Group successfully placed €500 million of five year Residential Mortgage Backed Securities at a cost of approximately 0.25%. The Group also reduced System Funding further in Q3 which now stands below 10% of the total funding base.

Despite the increase in mortgage lending drawdowns achieved in Q3, our core loan book continues to decline as repayments and redemptions exceed new lending. The Group expects to return to net lending growth in 2019, mainly as a result of slower growth in the mortgage market in Ireland.

 Asset Quality

ROI Home Loan and Buy-To-Let NPLs at the end of Q3 were down by €0.3 billion from December 2015. We note the publication of draft ECB guidance to banks on non-performing loans which we are reviewing in relation to the Group's NPL Execution Strategy, NPL Reporting and Impairment Methodologies. That said, we continue to execute a strategy of long-term forbearance for our customers. As of end June 2016, we have treated over 35,000 customers since 2013 and a large majority of these (c.90%) are performing to their restructure terms. These NPLs, while they are performing according to their restructure terms, continue to be classified as NPLs because of the nature of the treatments applied (e.g. Split Mortgage). We remain focused on working with our customers to improve the nature of their treatments to generate more value to the Group with the support of the improving Irish economy.

We recognise that we continue to have a significant proportion of customers who are yet to be placed on a sustainable treatment. We will continue to engage actively with these customers to expedite a resolution.

Capital & Risk Weighted Assets (RWAs)

At the end of Q3, the Group's Transitional and Fully Loaded CET1 ratios were 18.7% and 16.7% respectively compared to 17.9% and 15.9% at H1 2016. The increase is primarily attributable to improved underlying performance in the period. The Group's CET1 and Total Capital requirements for 2017 under the Supervisory Review and Evaluation Process are currently under discussion with the Regulator. We will communicate these to the market once discussions are concluded and the requirements are known. 

The Group also notes the ECB's focus on harmonisation of risk weights through its thematic review termed 'TRIM' (Targeted Review of Internal Models) and remains cautious on the potential impact of this initiative.

Non-Core Assets

The Group has agreed the sale of the residual non-core UK loan book which is expected to complete by the year-end. The transaction is expected to have an adverse impact of approximately 1.60%-1.70 % on the Group's CET1 ratio (on a Fully Loaded basis). Once the transaction is completed, the Group will have successfully deleveraged 100% of the Capital Home Loans portfolio; this will mark the completion of the €8.4 billion non-core deleveraging programme which was set out for the Group under the Restructuring Plan agreed with the European authorities in 2015. 

Outlook

The Group continues to trade in line with expectations. We remain on track to achieve our guidance for the second half for operating expenses and impairments. NIM is expected to be marginally higher than our previous guidance for the second half as a result of the sale of the residual non-core UK assets and a better Q3 performance.

Having completed the non-core deleveraging programme, the Group is now focused on strengthening and growing its core Retail and SME banking franchise in Ireland whilst maintaining an active portfolio management approach to all its businesses. Sustainable shareholder value creation continues to be the governing test for any acquisition or further disposals. Nevertheless, challenges remain in the form of constrained housing supply in Ireland, increasing Regulatory Costs and any potential negative impact on the Irish economy resulting from the UK referendum outcome.

Ends

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.