Permanent TSB Group Holdings plc (PTSB) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining the Permanent TSB Investor Call. My name is Gabrielle, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, Eamonn Crowley, CEO of Permanent TSB. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining the call, particularly at such short notice. I'm joined here by our CFO, Barry D’'Arcy. And over the next half hour, we will take you through the outcome of our IRB models application and what it means for PTSB. As was the case when we announced our quarter 3 update at the end of October, we restricted on what level of information we can provide as we were in a close period and also our formal sales process is subject to the takeover rules. As per standards process for any organization undertaking a formal sales process, our financial advisers, Goldman Sachs, are represented on the call this morning to ensure that all information provided is permitted under the takeover rules. Today's announcement is an extremely positive announcement for PTSB, and I'm delighted to be meeting with you today to update you on the outcome of our IRB models review. As many of you know, PTSB has been working on this project for the best part of 2 years and a positive outcome was critical for us to be able to successfully compete in the market, to grow our business over the medium and long term and to also achieve a sustainable return for our shareholders. And the outcome that we announced today ticks all of these boxes. From the end of this month, when the models go live, PTSB will no longer be constrained by a historical IRB model that was agreed in 2017, and that do not reflect the strong asset quality and balance sheet that we have today. And there is no doubt that we can look to the future with confidence with this new model. Many colleagues have worked on this project over a long period of time, and I want to acknowledge their contribution to its success. I also want to acknowledge the very constructive engagement with the Central Bank of Ireland throughout what was a very intensive process. So I'm now going to hand over to our CFO, Barry D'Arcy, to take you through the details. Thank you.

Thanks, Eamonn. As our statement this morning outlined, the new models will reduce our risk weighting on our total residential mortgage book from 36.4% we reported last June to a pro forma 32.8%. Excluding mortgages that are on a standardized model, which are essentially the loans we acquired from Ulster Bank, the reduction in risk-weight intensity for IRB home loan book amounts to circa 5 percentage points. Pro forma, the impact of the new models on our total risk-weighted assets at the end of June would be EUR 0.7 billion lower, reducing from EUR 10.9 billion to EUR 10.2 billion. This would raise our CET1 ratio from 15.5% to 16.6% releasing the equivalent of circa EUR 0.1 billion of capital at June. And just to note, with the models, we will see at December a more positive picture in the context of how the models will actually play forward, and I'll talk to that in a moment. What's important to understand is the new models give a far more favorable treatment to our front book than the models approved in 2017. Many of you have heard us talk about the risk weight on our new business being over 50% due to the bank's loss experienced during the great financial crash and the way the models were constructed at that time. While I will not disclose where this weighting has moved to now for competitive reasons, it has moved significantly down. Hence, the capital benefit we receive will increase over time as the bank grows its new lending volumes. Hence, our total RWAs will reduced by more than the EUR 0.7 billion at end '25 and as -- be as much as circa 10% lower by end '28 when compared to our medium-term plan. Factoring in this lower path for RWAs, we have made a preliminary estimate of what this would mean for our ROTE targets. For 2027 and 2028, we estimate that the previously disclosed 9% and circa 11%, we confirm that forward would rise to greater than 10% and circa 13%, respectively, in '27 and '28. And indeed, if you were to roll the model forward again, our ROTE would improve further. Our full year '25 results will be released in a few weeks on March 5, and we aim to provide you with some more details at that time, including what implications this could have for potential distribution capacity. Our current policy targets a payout ratio of 40% over time, starting from a moderate base. I can reiterate today that it is still our intention to recommend a modest final dividend to shareholders this year to be paid out of 2025 earnings. This will be subject to the required regulatory and other approvals. Today's announcement does not have any implications for the quantum of that distribution. In light of positive trading conditions, these 2025 results are also expected to close ahead of current market expectations. Given the restrictions Eamonn referenced earlier, I'm sure you will understand we cannot comment any further on our '25 results today or the FSB process, which continues to progress. So thank you for your attention. And Eamonn and I would now be happy to take your questions.

[Operator Instructions] Our first question is from Borja Ramirez from Citi.

I have 2. Firstly, I would like to ask with regards to the ongoing sale process, if there's any update you could provide as to maybe the number of interested parties, any new maybe competitors? And also if there's any time line for the bid? And then my second question would be...

Sorry, this is James from Goldman Sachs chaperoning the meeting. They won't be able to answer the first question at all. They can't give any details on the formal sale process.

Thank you, that is noted. And then my other question would be more on the cost side. Some investors have asked what could be the efficiency opportunity given also like if you could disclose from the staff, how many are in the head office?

That's something we'll update on the 5th of March when we issue our annual results. But this call is specifically about the outcome of the IRB model. So Borja, we'll have to -- we'll talk to you on the 5th of March because we're in the close period. And indeed, with regards to the FSB, we've also mentioned we can't comment on that today. So it's purely on IRB.

Our next question is from Denis McGoldrick from Goodbody.

Firstly, just to acknowledge it's obviously great that this piece of work has been completed. I know how much work has gone into it over the last couple of years. So it's great to see that over the line. I just have one question, and it's actually on the comments around restarting the dividends this year. So I guess you note that today's outcome, I guess, does an impact on the quantum of the dividend that you're thinking about. And I guess, in the context of the ongoing sales process, I'm just wondering -- and given, I guess, the stock obviously continues to trade at a discounted book value, would it not be in your interest to distribute as much of the excess capital as possible in advance of hopefully a completion of the sale? Just interested in getting your thoughts on that, please.

So I'll just comment initially, Denis, thanks for your question and then let Barry comment as well. So we have to put this in perspective that the last dividend the bank has paid was in 2008. We operated as an organization with a dividend blocker until 2 years ago. So the actual payment of a dividend -- a final dividend and the fact that we're confident subject to regulatory approval, we're confident of announcing that on the 5th of March, is a major milestone for us in that sense. It also has to be taken into account that the formal approval of the IRB models only happened yesterday evening. So in effect, any consideration of increased dividend payments can only operate from today onwards. It's not something we could have preempted or indeed thought about. So that's something we will outline on the 5th of March with regard to how we think about excess capital and things of that nature. But by way of a process and an approach, we now have to reflect on the impact of this. And indeed, as I mentioned, it would not be timely at this moment to work on any particular distribution for that period. But obviously, it puts us in a much stronger position, both by way of the level of excess capital and indeed the capital required to run this business over the next years which in itself is transformational.

Yes. And just to add, and as we said in the statement, we are committing to pay that modest dividend at year-end. But again, that's still subject to the required approvals. And -- but as you'd be aware, we'd also have to assess the impact of the new models through our ICAP and medium-term plan and fully run that through our governance cycle and then again, engage with regulatory authorities. However, the FSP has now taken place, and it's not appropriate at this time to take an out from this review and formally change our distribution policy. So that's the position, Denis, as it stands now.

Our next question is from John Cronin from SeaPoint Insights.

Can you hear me okay?

Yes, John, yes.

Great. Congratulations on getting this over the line. Now look, my question is really same as Denis', but just to extend on it, I guess. In terms of the review that you're doing now that you've had this outcome in the context of the ICAP and going through the governance process. I know you said you'll update on that on the 5th of March. Just trying to understand like could that be completed by the 5th of March? And would you -- I'm trying to understand timing really. Could you do a special dividend, for example, as soon as late March or early April with all the requisite approvals in place? Or is the ICAP and governance process much more elongated than that?

So I mean, your questions are well put and indeed these are aspects of which we will consider with the Board in due course. And we can't speculate on how that will land today. So we have to consider with our Board and again, update on the 5th of March. And that's really all I can say at this moment. But what obviously, John was supposed -- is a very strong position, both by way of our current capital position and indeed how we think about capital going forward. So that's all I can say at this moment.

Our next question is from Daniel O'Neill from Carraighill.

So just 2 from me. Firstly, obviously, this is great news. But even so, RWA density in Ireland is still high relative to European peers. So I'm wondering, are there any other items you can consider to improve your risk efficiency, things like SRTs. Obviously, we know your competitors are doing this. So yes, how should we think about this going forward? And then secondly, how should we now think about your ability or should I say, plans to compete on mortgage pricing?

Thanks, Daniel. Just on the capital optimization piece, as you'd be aware, we've been very cognizant of our capital position and risk weights over time. It's something that now that we've got this outcome concluded as part of our planning cycle, we will consider all elements in terms of how we actually improve our capital position. We haven't really looked in detail at SRTs or other elements. But as we go through the past this phase, it's something that we will keep an open mind towards in terms of capital optimization. With regards to the second question, on mortgage pricing. Broadly, we keep a very active look at the mortgage market. We are very well positioned today. We announced pricing yesterday changes that actually were decided upon in advance of this approval. So we believe today, we're actually very well positioned from a pricing viewpoint. And again, we keep pricing under consideration, and we'll see how we are positioned in due course. So we are in a good place right now.

Our next question is from Rob Noble from Deutsche Bank.

Can you just -- a few technicals on the risk densities, right? Can you help us with the math on the IRB approval? So the Pillar 3, I see real estate exposure of EUR 22 billion. I think you base it off of a lower number. So just what's the difference between what I'm seeing in the Pillar 3 and what you put in the statement? And then going forward, what risk density should we assume that the new lending is coming in at now? Is it the existing back book IRB risk density of, say, 33%? Or is it something different? And then lastly, that risk density on the IRB is still higher than bank and AIB. Why do you think that is? Or is that something that could be optimized over time?

Just on the first piece, we'll obviously have full Pillar 3 disclosures in a couple of weeks' time. But I think the key difference between what you see there is both buy-to-let and SME captured within some of the model piece. So we can capture that separately if that's okay, Rob. Just on the densities and where we close out, we can't comment on how others are, their competitive position. I think going back to it, what we've stated previously is that the models in 2017 were built at a point in time, which reflected relatively little new business and actually, it was positioning to protect that back book. What I would see with this model going forward is that we've normalized our position in terms of how we look at capital and the risk profile. And what we would see is in that front book that, as I mentioned, would be considerably lower. It allows us to compete more effectively into the market. And I can't comment on exactly what it is in terms of where we've ended up. But in effect, it will allow us to play an appropriate role in the market with the growth that's taking place there, too.

Yes. And just to add that there's about 30% of our book is pre-global financial crisis. That will pay down over time and has a higher capital weighting given the experience in that book. As Barry just mentioned, the new book is created under -- with a lower capital rating, which is market competitive in the sense of where we are. And that could be the transformation. effectively, the back book will release capital over time as it pays down and the front book will be originated at lower capital levels to hence that transformation. Can I just add one thing with respect to not to leave any uncertainty, on the 5th of March, I do not envisage that we will be mentioning anything more than having subject to the regulatory approval, a final dividend regard to 2025. I do not -- there won't be anything else at that moment, but we will be able to update our position with regard to how we think about excess capital and how we think about it in a wider sense of where we're positioned at this moment. So not to leave that unsaid as regards our position as we move into that 5th of March time frame. That relates to an earlier question from John. So there's no uncertainty in that regard. So thank you.

Our next question is from Peter de Lacy from Cantor Fitzgerald.

Okay. Just in terms of the negotiations or engagement with the Central Bank, what were the main areas of pushback? Or did they generally accept the model as proposed asking lots of questions, obviously, but were there any areas that needed significant amendment from what you had initially submitted, and why was that?

Thanks, Peter. I think as people are broadly aware, the any IRB engagement is very fulsome. And what we've been able to try and do with this outcome is actually reflect our current position. And we're pretty happy with that outcome today in terms of all the core elements that we wanted to see come through have come through. And that engagement while robust from the Central Bank, allows us to actually move ahead with the outcome today. So I would say there's -- it's been a very constructive challenging engagement, but it's been pragmatic at the same time. So I think what I'd say here is we're pretty happy with this outcome. And there's not a whole lot left in terms of -- to be said in that context. It's a good outcome for the bank.

Our next question is from Diarmaid Sheridan from Davy.

Congratulations to you and the team on a very significant achievements today. Maybe just thinking about going forward and looking at, I guess, the other part of capital optimization in terms of your overall capital stack and your MREL stack. To what extent in your revised ROTE published this morning, are there any benefits from having a lower risk-weighted assets incorporated into those and from today's announcement?

Thanks, Diarmaid. A very good question. Today, what we're purely reflecting is the change on the IRB risk weights. We haven't have the luxury of time, given, as Eamonn mentioned, the approval only came through last night, to actually think through and plan out how we'd look at capital through time. As previously disclosed, we have a very robust MREL level. We know that's something that we have said previously, we'd continue to look at. And indeed, this position and this outcome now, especially as you look through time, puts us in a better position to think that through in a more positive way. But we haven't captured that in any of the OLT numbers as they stand today. But no doubt that would actually improve things further, but we haven't captured that at this stage.

Our next question is from Fatima Ghaznavi from Keefe, Bruyette & Woods.

I just wanted to ask on your potential provision release as you review your IFRS 9 assumptions and models, you haven't given us much details on this. So could you maybe give a bit more color around when you might update us? It seems like there's still some value levers you could pull ahead of being sold? And is there maybe a reason why you're holding back some of these benefits?

Thanks, Fatima. As we've said, we will be announcing results on the 5th of March, and a key element of that will be -- part of that will be an update on IFRS 9 as well and what we've been able to deliver there. So that is only a relatively short period of time away. So we look forward to providing that update at that time. And today, it's primarily focused on IRB. We're not commenting on anything else from a results viewpoint at this time. But we'll -- we will share that detail in full color on the 5th of March.

[Operator Instructions] We have a follow-up question from Peter de Lacy from Cantor Fitzgerald.

Can you hear me now?

Yes, we can hear you, Peter, yes.

Okay. Yes, sorry about that. Just wanted to understand how the risk weighting will change -- risk-weighted asset weighting will change over time as you lend into the mortgage market. Is the lower rating applicable to recent loans going back a number of years? Or is it only on forward loans? Or are there buckets of risk weighting that apply to different cohorts, be that, say, 1 to 5, 1 to 3? Just so I can help understand that a bit better how the RWA weighting might change over time?

No, Peter, that's a good question. So it will -- in effect, we updated our credit policy back in 2012, followed by the macro prudential rules in '15. So what we've seen over recent times is a very low level of default rate in that portfolio. And through time, what we've seen is actually the book pre-2012 has actually been the more challenged element of the portfolio and carries higher risk weights. So what we would see is actually that back book to a certain extent, that is more recent vintage will improve. But also the key element as we've said, is the front book as we write new business, given the growth in the market and actually the mortgage market growing and our share in that will actually help that picture further. And as Eamonn mentioned, with the back book paying down, we'll see the mix change between that front book and back book quite substantially change out over to 2028. Probably by 2028, that front book mix will be more 80-20 versus front book today about 35% to 65%. So we're going to see quite a change over that period of time in that context.

Our average risk weight will reduce in that sense from now on and will transform in that respect.

[indiscernible] The underlying characteristics of the portfolio. So if we continue to underwrite in a very positive way, we'll see that feed through into our capital outcome, which we intend to do.

We currently have no further questions. So I will hand back to Eamonn for closing remarks.

Thank you very much, and thank you, as I mentioned earlier, for joining the call at short notice. For us, this is a milestone announcement in the sense of we've lived with the existing IRB model since 2017 We've been able to operate with those, but indeed, it has affected our return on equity over time. And now you can see a clear path to getting to double-digit and mid-teen ROE over the not-too-distant future. We did say and promise to the best of our ability to deliver this result before the end of January of this year. We have and that's down to the work and effort by internal teams, but also the positive engagement with the Central Bank over that time. So it is a milestone day for us. It does provide clarity in the market to our position and indeed puts us in a great footing and a great position to grow and compete in this market over the medium term. So we are delighted with the outcome, and we will roll on now to the 5th of March to update the market on 2025 performance and indeed where we're positioned as of December with regard to our capital position. So thank you very much.

This concludes today's Permanent TSB investor call. Thank you for joining. You may now disconnect.