On Tuesday this coming week, Permanent TSB is set to unveil its financial results for 2012. At midnight two days later, the Government will withdraw the Eligible Liabilities Guarantee meaning depositors in PTSB no longer enjoy an unrestricted guarantee on deposits. PTSB is the weakest of the three state supported banks, but has been most at pains in recent times to claim and evidence that it has sufficient cash on hand to meet its liabilities. It has entered into funding arrangements with private banks whereby cash has been advanced to PTSB to meet two very meaty bond repayments, which together totaled €2.6bn, that were scheduled to be repaid in January and April 2013.
The latest PTSB results available today are for H1,2012 and are available here. The group made a loss of €600m for H1,2012 and the betting is that it has made a similar loss in H2.
PTSB has a large Irish mortgage book and appears to be suffering greater than average arrears compared to domestic banks, and it also has the largest proportion of tracker mortgages which are loss-making in Ireland and the UK where record low base rates of 0.75% and 0.5% respectively mean that PTSB is making a loss on such mortgages when its full cost of funding is north of 4%. Ireland is moving very slowly towards dealing with the mortgage crisis, with a new Personal Insolvency Act which is just awaiting the commencement order from Minister Alan Shatter and a newly announced arrears resolution scheme which is supposed to strong-arm the banks into dealing with problem mortgages, with the threat of the stick of being forced to write the value of loans down to the underlying security if they fail to get to grips with the problem.
What has this to do with the safety of your deposits?
PTSB had €17.3bn of deposits at H1,2012. It is facing into a very difficult environment where house prices are still declining, where unemployment is 14% with 8,000 jobs flagged to be abolished in the public sector in 2013, where disposable income is being hit with cuts to the childrens allowance, and where the new property tax and water charges will eat into net wages, and where gross wage growth is modest. If PTSB fails to meet Government targets for restructuring 50% of problem mortgages by the end of 2013, it must write down the valuation of its loans to the value of the underlying security.
PTSB, like AIB and Bank of Ireland has been recapitalized by the Government and at June 2012, was sitting on a healthy capital buffer, €3.077bn net equity, especially compared to European banks.
Before getting all catastrophic about Ireland’s deposits, we should remember that Irish banks are amongst the most probed and prodded in the world. We have the Troika of IMF, EU and ECB keeping close watch on the banks and their activities, with daily and weekly reporting. We have a central bank with a new ethos and staff, following the laxness in the 2000s which contributed to the financial crisis. We’ve paid €30m in fees for BlackRock, Barclays Capital and the Boston Consulting Group to examine the books of the banks in detail, to provide what has probably been the best stress-testing in Europe, and we have recapitalized the banks at significant public expense to cope with the bad business they had accumulated in the 2000s. So, of all the 17 countries in the EuroZone, you might expect Ireland’s banks to be amongst the strongest and best able to withstand a shock.
But having said all of the above, with PTSB facing a very challenging future with the prospect of large mortgage losses, might PTSB become insolvent, and if it does, might this Government “pull a Cyprus”
The deposit outflow continues in Ireland
There is no longer monthly tracking of deposits in Irish banks on here. Retail deposits from ordinary households and businesses stabilized in mid-2011 and since then there has been modest growth. By this measure, Ireland is off the critical list and that is why the tracking here was discontinued. But overall deposits in Irish banks are still falling. We found out recently in parliamentary questions that there was a 13% decline in deposits between December 2011 and December 2012, from €218bn to €190bn. Total deposits are still declining. On 12th March 2013, finance minister Michael Noonan said “in the table below, it is shown that at the end of 2012, the Central Bank held 379 million euro, which represented 0.2% of the 190 billion euro on deposit in Ireland at the end of 2012. It is true to say that this was down 12.9% from the 435 million euro held by the Central Bank at the end of 2011, which represented deposits of 218 billion euro. The decline in the DPA balance reflects the drop in deposits in Irish credit institutions.”
The deposit guarantee scheme
After the Eligible Liabilities Guarantee runs out at midnight this Thursday, 28th March 2013, depositors will still be enjoy a €100,000 guarantee. But if a bank goes bust, who will foot the guarantee? The Central Bank of Ireland operates what it calls the Deposit Guarantee Scheme and the way it works, is banks which accept deposits in Ireland are required to hand over 0.2% of their deposits to the Central Bank every December. So if Bank A has €10bn of deposits at December 2011, it hands over €200m to the Central Bank. If deposits in Bank A increase to €11bn by December 2012, the bank hands over an additional €20m. If deposits in Bank A fall to €9bn in December 2013, then the Central Bank refunds €40m to the bank. That way, at the end of each year, the Central Bank is holding 0.2% of all Irish deposits in Irish banks.This is the table of the sums that the Central Bank has had on hand each December for the past six years. In 2012, the Central Bank extended the guarantee scheme to credit unions for the first time.
Obviously, if there was a complete failure at PTSB, then the Deposit Guarantee Scheme with €403m would be unlikely to meet the sub €100k claims, though it should be stressed we don’t have a split of the €17.3bn of PTSB deposits between those sub-€100k and €100k+.
Might the government reach into your deposit accounts for a levy?
Oh yes, in the past week Labour’s chairman of the Oireachtas finance committee Ciaran Lynch and Fine Gael’s jobs minister, Richard Bruton have both indicated that a levy on sub-€100k could be on the cards despite the existence of the sub-€100k guarantee. There seems to be a feeling that the guarantee only applies if a bank is allowed to go bust, but if there was an intervention before the bank was actually liquidated then all depositors including those with sub-€100k deposits would face “levies” despite the existence of the deposit guarantee scheme. Minister Bruton said on radio today that Cyprus imposing a levy on sub-€100k deposits was “in the remit” of the Cypriot government. The experience of this Government taking €1.88bn from private pensions between 2011-2014 to fund the Jobs Initiative (mostly the reduction in VAT on certain services), would also make you ill-at-ease that the Government would regard as sacred the guarantee for sub-€100k depositors.
Given that banks are built on the principles of confidence and trust, any talk of “bank runs” is unwelcome to bankers, and because of the necessity of banks to the functioning of the economy, such talk is also unwelcome throughout Officialdom. But with Cyprus sailing rudderless towards an exit from the euro with the re-establishment of an independent central bank, unfortunately for Officialdom, bank-runs are back on the agenda here. When the idiots in the room a week ago at the Eurogroup meeting allowed the Cypriot finance minister to leave with the proposal in his breast-pocket to levy all depositors, those finance ministers unleashed a toxic mixture which has undermined trust in Cyprus but which threatens to undermine trust across the EuroZone.
A consequence of last week’s fiasco is, Irish banks will remain under the spotlight, and the weakest will be most closely watched. It is a vicious circle because fear breeds mistrust which means people withdraw deposits which in turn undermines the financial stability of the institution and makes failure more likely.