PTSB could free up €270 million of expensive capital on its balance sheet under a project to convince regulators to allow it reduce the implied riskiness of its mortgage book, according to analysts at Bank of America (BofA).
Every €100 of mortgages the bank issues has a so-called risk weighting of more than 40 per cent, against which it must hold capital. The high risk-weighted assets (RWA) density is a result of the bank’s experience of the arrears crisis following the financial crash, when as much as 28 per cent of its mortgages were non-performing.
By contrast, the risk weighting on new Bank of Ireland and AIB mortgages is in the 20s, which means they can write new business more competitively.
The unlevel playing field contributed to PTSB’s market share for new mortgages sliding to 15 per cent in the final three months of last year, from 23 per cent for the first half.
PTSB chief executive Eamonn Crowley said last week that the bank is working with advisers on a plan to overhaul its internal loan risk model. The hope is that it will get some relief from regulators by the end of next year, he said.
BofA Global Research analyst Alastair Ryan said some €270 million of equity capital – the equivalent of a third of PTSB’s current market value – could be “liberated” if mortgage risk-weights on the bank’s high-quality home loans were reduced to the levels of its two larger peers.
“Like other Irish banks, PTSB’s mortgage credit quality has improved out of all recognition,” he said. “But Irish banks’ risk weights remain high, and PTSB’s even higher.”
Is Ireland in recession?
The average risk weight on home loans across the euro zone was less than 15 per cent as of the end of September, according to BofA Global Research data.
Some 70 per cent of PTSB’s €20.2 billion of mortgages has been issued since strict Central Bank lending rules were introduced nine years ago, Mr Crowley said last week, as the group unveiled full-year results. The portfolio includes loans taken over from Ulster Bank as part of the UK-owned lender’s exit from the Irish market.
Irish banks have also weathered the Covid-19 pandemic and cost-of-living crisis to date without a spike in defaults.
Mr Ryan upgraded his rating on PTSB’s shares to “neutral” from “underperform”, highlighting how the stock is trading at a 60 per cent discount to its two rivals relative to the tangible net value of their assets.
PTSB shares were up 1.4 per cent at €1.45 at lunchtime in Dublin. However, they remain down 42 per cent over the past 12 months. The wider Iseq Financials index is up 0.5 per cent over the same period.
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