Permanent TSB (PTSB)
An Irish Bank that's unrecognisable from the past - thank goodness!
When capital leaves an industry, it naturally causes competition to decrease and geographical consolidation to occur. With only a few competitors remaining, it’s common for pricing power to return and profitability to improve to a more normal level. After many years of pain following the financial crisis and one of the worst housing bubbles in Europe, the Irish Banking system is finally showing signs of this recovery.
At the peak of the housing bubble in Ireland, there were ten banks (seven domestic and three foreign) competing to issue increasingly risky loans into an overheating market. Yet as of today, with the impending departure of Ulster Bank (owned by the UK’s NatWest Group) and KBC (owned by the Belgian group of the same name) the Irish Banking system is left with only three main competitors. When an industry goes from ten competitors down to three, I sit up and take notice, especially within a regulated and historically profitable industry such as banking. Canada and the Nordic region have some of the most consolidated banking systems in the developed world and have also proved to be some of the most profitable and resilient over decades.
The Irish housing market is finally showing signs of stability. Regulators have implemented mortgage lending rules that are among the strictest in Europe and house prices continue to be supported by a chronically undersupplied market where homebuilders are estimated to be constructing only about half of the new homes required to meet demand.
Permanent TSB is the smallest and simplest of the remaining Irish Banks. It takes in deposits from customers and conducts most of its lending in the form of repayment mortgages, administering around a fifth of the Irish mortgage market. After almost a decade, I believe Permanent TSB is in the final stages of transitioning from issuing questionable mortgages in a highly competitive environment to issuing conservative loans within a more lenient competitive environment. I have already seen three straight years of profitability prior to the Covid-19 pandemic combined with improving asset quality as the number of non-performing loans is reduced to around the European average.
After bailing out Permanent TSB, the Irish government still owns around three quarters of the bank. They are working to improve the banking system with the aim of ultimately selling their shares to investors at a politically acceptable price. This may take some time but as a patient investor I am prepared to wait because I believe that the future of Permanent TSB will be a much more profitable endeavour than its past.