Since Permanent TSB announced a planned loan sale of Non-Performing Loans (NPLs) some commentary suggests that the Bank had been slow in tackling the NPL problem since the financial crisis.
The figures contradict this. Since 2013, the Bank has reduced the value of NPLs on its balance sheet by almost €4 billion (42%) and by 10% in 2017 alone. Loans linked to over 13,800 homes have been restored to Performing status thanks to the hard work of the homeowners and the bank.
This didn’t happen by accident. Six years ago, the Troika and the Irish Government mandated Irish Banks to use long-term forbearance as the primary tool in managing the high level of mortgage arrears across the economy. This was sensible for three reasons. Firstly, because the consequences of widespread repossessions were considered unacceptable, secondly, because the capital cost to the banks of long-term forbearance was considered the least worst alternative for Irish taxpayers and, thirdly, because the Irish banks were capitalised by the taxpayer on the basis of the long-term forbearance approach.
The Bank executed this strategy of ‘Arrears Management’ very effectively. We established a best-in-class Asset Management Unit with up to 300 people working in it. We put in place processes and engagements to stem the flood of new arrears cases leading to a lower level of arrears now than is the industry average. We contacted the account holders of loans linked to almost 35,000 properties. We assessed loans linked to 32,000 properties individually. We made offers to restructure the loan in respect of approximately 29,000 properties; offers which were accepted in respect of 25,000 properties. Finally, there were loans linked to 2,700 properties where the account holders didn’t engage in a material way.
We ensured, as a result of all these activities, that mortgages linked to 13,800 properties have either been returned to Performing status or paid off in full as customers responded to the help we gave them.
However, both the Regulator (the Single Supervisory Mechanism/SSM in Frankfurt) and the Board of the Bank is now clear that the Bank should manage down its remaining NPL stock in a credible and ambitious manner - and this also applies to all European banks.
Most commentators agree that NPL management is important. It reduces the drag on banks’ balance sheets, reduces the risk of negative consequences in future economic downturns and increases the ability of banks to contribute to the growth of the real economy. It makes banks safer and more stable which is important for our customers and stakeholders.
As we stand today, regulatory guidance makes a loan sale an inevitable choice by the Bank - even if it’s not a specific direction by the regulator. It is simply not possible to meet the regulator’s target and timescale within the Bank’s capital envelope, without a loan sale.
Of course, a loan sale won’t achieve everything on its own. We are open to existing and new ideas, and we have pioneered some important innovations. The only approach which we rule out is blanket debt forgiveness which would raise issues of moral hazard and unfairly penalise borrowers who do pay, to favour those who do not.
In dealing with the NPL challenge, Permanent TSB has embraced different approaches, including debt write off once a property has been surrendered for sale.
We have pioneered a debt write off scheme for Buy to Let investors with NPLs where we write-off debt linked to an investment property in cases where the account holders surrender the property to the Bank for sale. Approximately 1,300 properties were surrendered to the Bank under this scheme since September of last year.
We have facilitated substantial debt write-off in cases of voluntary surrender involving a Home Loan.
We are strong supporters of Mortgage To Rent. We believe that up to 1,000 mortgage accounts might be able to avail of this scheme and we are working with two parties, including David Hall’s iCare Group, in respect of such accounts.
While we have made huge progress on reducing the overall amount and value of NPLs, the ratio of Non-Performing Loans to Total Loans has remained stubbornly high. Factors here include a reduction in the size of our overall loan book over the same period, a decline that was accelerated by the sale of Performing Loans which was required under the Bank’s agreed Restructuring Plan.
On loan sales, much of the commentary focuses on customer protection. The Governor of the Central Bank of Ireland confirmed recently that, where a loan is sold, the protections “travel with the loan” and that “borrowers are protected in accordance with the consumer protection framework”.
And, of course, thousands of such loans have already been sold by a variety of banks in Ireland. As the Governor also pointed out, the evidence to date does not support the narrative that these secondary buyers are managing these loans any more aggressively than the original banks were.
In summary, if PTSB is to prosper and grow to support the ongoing economic development of the country then the NPL ratio must now be reduced dramatically and quickly. Any debate that suggests otherwise should reflect the consequences for all taxpayers of not taking the actions that are necessary.
Jeremy Masding is cheif executive officer of Permanent TSB Group Holdings plc