The banks passed a stress test! Whoopee! and it only cost us €27bn
It was also spun out as a positive indicator for the future that Irish banks might now start to lend more money.
This missed the point entirely. In a country where the State bailed out the surviving banks to the tune of nearly €30bn, after conducting very arduous stress tests itself, basic innumeracy was the only way taxpayers would have had to fork out any more money for Bank of Ireland or AIB.
Of course they passed the stress tests! What does this mean? It means they are bullet-proof against any future shocks or stresses. That’s because they received around €27bn from the State. And they have been hoarding it ever since.
In the case of Permanent TSB the fact that, despite a €2.7bn state bailout, it still couldn’t pass the test, shows what a completely broken banking model it had by the time the property market crashed – the proverbial horse with a broken leg that nobody would put down.
By the end of last year, six and a half years after house prices began to fall, Permanent TSB was still shrinking. It was experiencing increasing levels of non-performing loans. It was still dependent on ECB funding. It was still losing money. It cost more to run the bank in 2013 than it did in 2012.
It is hard to breathe a sigh of relief about PTSB. It needs to raise “only” €125m in fresh external capital, after using up €400m of contingent capital notes from the State. This was €400m in a buffer that might only have been needed in a worst case scenario. That has been exceeded as Permanent TSB continues to crash through all buffers.
It is expected to raise about €200m from private institutions in the coming months – made up of the €125m, plus a bit more “to be sure to be sure”, plus the fees paid to advisers for raising it.
The bank probably will raise the funds successfully, but how much equity will these new investors get for their money? We got 99pc for €2.7bn. Based on what we paid, these new investors should get 7.3pc for €200m. Every percentage above 7.3pc that private investors get for their €200m marks the scale of the losses to the taxpayer from this former building society.
Permanent TSB can’t be valued on a multiple of profits, because there aren’t any. It could be valued on its loan book, but that is getting smaller. Its loans to customers shrank by €2.3bn in 2013. This is a bank that is lending less, not more.
After the property crash, Permanent TSB had one of the worst loan-to-deposit ratios of all of the banks. It was running at over 250pc, showing its addiction during the boom to borrowing money from international banks rather than gathering deposits.
In recent years it has been running a “back to basics” TV advertisement campaign in an effort to win back customer deposits and get that metric back in shape. According to its 2013 accounts, it has had some success. Money in retail current accounts and retail deposits rose in 2013 by a reasonable €439m. But the accounts show that corporate and institutional deposits shot up by €2.4bn.
This suggests a massive vote of confidence by the international corporate community, until you read the footnotes which say that €2.2bn of it came from a “short-term sale and repurchase agreement with a government institution”. This is the state helping the state.
Chief executive Jeremy Masding came into the job in early 2012. In fairness, he had an unholy mess on his hands. Four years after the bank guarantee, the bank still didn’t have an EU-approved restructuring programme. It was losing €1bn a year and locked into loss-making tracker mortgages.
Masding has chipped away at issues in the pension fund, refocusing the bank on deposits and trying to rebuild. He has also trimmed costs. However, the company appears to have a near addiction to using outside consultants, paying enormous fees for advice and outsourcing projects.
For example, last year Masding managed to cut staff-related pay by €23m (15pc). Most of that came from a pension saving. However, total operating expenses, ie, the cost of running the bank, rose by 6pc or €17m, because of a 36pc increase in other “administrative costs.” These costs rose by €42m to €156m, mainly due to “provisions for liabilities and an increase in professional fees associated with credit management, business outsourcing and transformation projects.”
The accounts show that after spending €53m on professional and contractor costs in 2012, another €14m was spent last year. Permanent TSB paid its auditing firm, PWC, €5.5m for non-audit work in 2012. It spent €48m on legal and professional fees between 2011 and 2012.
Its overall financial position in 2014 is likely to look a lot better than it did at the end of 2013. A sizeable chunk of that will relate to rising house prices, something for which management can take zero credit.
Its 2013 loss of €688m was better than the €977m it lost in 2012. Its total operating income came in at €252m. It then cost €300m to run the bank, excluding exceptional items or impairment charges. On a basic money in and money out measure, without regard to historic loan losses, it still lost money.
The accounts brag that its net interest income, a bank’s primary source of revenue, increased by 3pc. However, it goes on to point out this was driven by “a 10 basis points increase in net interest margin, more than offsetting a 9.1pc decrease in average interest earning assets”.
This means, it had fewer loans paying it interest, but it more than compensated for this by hiking up what it charges the borrowers it still has.
Average staff numbers in 2013 were higher (up 1.1pc) than they were in 2012.
It has over 2,000 staff and 76 branches. Without the €2.7bn injection from taxpayers it was toast. Should it have been let go?
Private investors will drive a very hard bargain when it comes to this outside investment.
They will see an opportunity to make money from an investment in Permanent TSB if they get it at the right price.
We are about to get fleeced. The State isn’t holding any good bargaining cards.
For the Irish banks, the stress tests were virtually meaningless – a mere footnote in the banking crash. They were more significant in showing that nine Italian banks couldn’t pass them. The tide is going out in Europe and quite a few have been caught swimming with no clothes.
Article Source: http://tinyurl.com/kbwqb42