- PTSB chief's focus on loan arrears begins to pay off
- Bond sale by AIB and ECB appointment also reflect new era
On his first day as chief executive officer at Permanent TSB Group Holdings Plc, Jeremy Masding stumbled across the mortgage arrears department in the bank’s warren of a headquarters in Dublin. He found a lone employee trying to get rid of a caller so she could eat lunch.
It was 2012 and Masding realized Irish bankers weren’t ready for the tsunami of bad loans crashing down on them after western Europe’s worst property-market crash, a crisis that had locked them out of international credit markets. He quadrupled arrears staff, extended working hours and picked company insider Shane O’Sullivan to head a new unit to deal with clients in trouble.
In a country that was a by-word for banking crisis, the results are beginning to show. The bank said this week that mortgage arrears are dropping for a second straight year, and Allied Irish Banks Plc told investors earlier this month that it’s preparing to re-enter the bond market. Kudos has come from the European Central Bank, which chose an Irish central bank official to lead a group looking at strategies to deal with troubled loans across the euro region.
“Irish supervisors have done a great job in addressing this issue,” Daniele Nouy, chairman of the ECB’s oversight arm, said by e-mail. “We are moving forward building on good supervisory practices.”
Ireland’s benchmark 10-year bond yields have fallen to 1.2 percent from 14.2 percent in 2011, when the scale of losses in the banking system and the burden saddling the taxpayers who bailed them out began to become clear.
The yield on Bank of Ireland Plc’s June 2016 senior unsecured bonds has dropped to 0.55 percent from 4.2 percent in June 2013, when mortgage arrears peaked. The yield on AIB’s November 2016 senior unsecured bonds has fallen to 1.02 percent from 3.39 percent two years ago.
The three biggest institutions still have a combined 37 billion euros ($40 billion) of bad loans, based on their most recent earnings reports. Defaulted loans at Bank of Ireland, the nation’s largest lender, have fallen 32 percent from 2013. Non-performing loans at Permanent TSB Group, known as PTSB, dropped about 20 percent.
“I don’t think any of the banks were ready to deal with the arrears challenge at the time,” O’Sullivan, who joined PTSB in 2000 and served in various roles including head of corporate development, said in an interview. “That had to change.”
A number of factors are at play. First, unemployment is dropping as the economy rebounds and more people can service debt, said Karl Whelan, an economics professor at University College Dublin.
Others point to a more active approach by the government. It created an insolvency service, which allowed troubled borrowers to seek a brokered settlement if their banks weren’t coming up with an acceptable compromise. The government also made it easier to go bankrupt, while the central bank pushed banks to restructure loans or face penalties.
Banks took a more active approach. In the case of PTSB, the number of staff working on arrears rose by more than 200 to 275 and they were made available to speak with clients until 9 p.m. and on Saturday mornings. New strategies on offer include permanently cutting interest rates, splitting mortgages and extending the length of home loans.
Whelan is skeptical about the long-term value of these moves. “Most of the so-called restructurings of these loans have consisted of rolling up arrears or extending maturities,” he said. “There have been very few debt writedowns.”
Others are more sanguine. By 2018, PTSB will free up about 750 million euros it previously set aside for bad loans, said John Cronin, an analyst at Investec Plc in Dublin.
AIB has started releasing bad-debt provisions as defaulted loans fell, a bonus as it prepares to move back into private hands and credit markets. The bank said last week it’s on track to repay a tranche of its government bailout, partly by issuing at least 1.25 billion euros of subordinated bonds for the first time since the crisis.
“There will be big demand for both of these instruments, especially in expectation of the government selling down its stake in the bank next year,” said Cronin.