Questions remain over Permanent TSB's plan to split the bank in two

Questions remain over Permanent TSB’s good bank / bad bank plan

By Business Editor David Murphy

Imagine meeting your bank manager to discuss your financial situation. You have a performing owner-occupier mortgage and a buy-to-let loan which is in arrears.

Despite your financial problems you are upbeat about your situation. You tell the manager that you have never missed a repayment on the loan on your home.

The bank manager stops your confident patter, interjecting to ask about your buy-to-let mortgage which is in irreversible trouble.

You sit back, look him in the eye and say you are unconcerned. You tell him that you view the buy-to-let loan as “non-core”.

If anybody did try this, they would be laughed at.

But, in many ways, this is how State-owned Permanent TSB finds itself behaving.

Its CEO Jeremy Masding has split the lender into a good bank, a debt collection unit and a bad bank.

Mr Masding has been extolling the virtues of the good part of the bank to investors.  It represents less than half of the entire group.

He sees it as being profitable by 2016 and is to begin seeking investors for it later this year.

But his problem is that Permanent TSB is still responsible for the other parts of the bank.

Three years ago it received €4 billion in capital from the taxpayer. The State recouped €1.3 billion of that investment with the sale of Irish Life, but the real problem is that Permanent TSB continues to burn through cash.

Its tracker loan book is losing about €400 million per annum. Its interim results showed the bank suffered an operating loss of €449 million.

It has also admitted it will have to set aside more money to cover loan losses following the Central Bank’s balance sheet assessment late last year.

The company remains adequately capitalised, but it does not take a genius to figure out that – in its current form – the bank is not sustainable by itself.

Mr Masding has been pushing for a solution.

There has been protracted speculation that could involve troubled parts of the bank being spun out into a separate vehicle.

Permanent TSB is awaiting approval from the European Commission for a business plan and says its proposals have, so far, received a favourable reception in Brussels.

But the biggest hurdle is rapidly approaching.

The European Central Bank is to stress test five banks in Ireland; Permanent TSB, AIB, Bank of Ireland, Ulster Bank and Merrill Lynch (the latter as a significant trading presence in Ireland).

As part of this it is envisaged that banks would have to prove they have enough capital to see them through for the next three years.

The question to be asked now is: if they don’t have enough capital, where could the money come from?

Permanent TSB’s capital buffer will be 15.9% in the second quarter of this year, down from 22.2% last year, but still well above the minimum 10.9% level set by Central Bank.

However, if the stress test shows Permanent TSB requiring more capital in coming years, a solution will have to be found.

It is encouraging that Mr Masding has carved out part of a sustainable business from Permanent TSB, which seriously considered shutting in recent years.

While the CEO may be able find players willing to invest in the good bank, the question is; who is going to take on the parts that are left? And if they need further capital, where will it come from?

Like the customer talking up their ability to pay performing loans while overlooking the borrowing in arrears, it is the solution for the troubled parts of the bank which deserves the closest scrutiny.

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