ptsb has sold a tranche of restructured mortgages

Discussion in 'Housing and mortgage arrears - policy issues' started by Brendan Burgess, 29 Nov 2018.

  1. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    37,055
    These are only NPLs in the technical sense of the word. The Central Bank rules say that split mortgages which do not make 100% provision for their warehouse are NPLs.

    I don't think that ptsb wants to sell these. They are forced to sell them. They have plenty of capital, haven't they?

    The last thing that they should be doing is selling profitable loans, whose profitability will increase over time.

    Brendan
     
  2. Andy836

    Andy836 Frequent Poster

    Posts:
    364
    Last edited: 5 Dec 2018
    They don't. If they had excess capital they could have done what AIB did and fully provide for the warehoused portion and structure it in such a way (two separate loan docs maybe) that they were no longer NPLs.

    At of June 2018 PTSB's CET1 (fully loaded) was 13.4% (minimum is 9.825% I think). That seems like they've got loads of headroom but their CET1 (FL) was 16% at Dec 2017. A big 3% fall in only 6 months.
    PTSB's RWAs are increasing rapidly now as their risk modeling is being refined due to the ECB’s Targeted Review of Internal Models (TRIM). This added close to €600mm in RWAs in H1 2018 with a further €1.7bn expected to be added as TRIM progresses

    So at H1 2018 you've got CET1 (FL) of €1,506mm versus €11,211 in RWAs = CET1(FL) ratio 13.4%.
    Add €1,700mm in additional expected TRIM related RWAs brings you to €12,911mm RWAs versus CET1(FL) of €1,506 = CET1(FL) ratio of 11.7%.

    Assume they took the €300mm provision on the Warehoused portion of these loans. This reduces RWAs by €300mm but also reduces capital by €300mm.
    So you've now got €12,611mm in RWAs versus €1,206mm in CET1(FL) = CET1(FL) ratio of 9.56% which is barely above the minimum threshold. Undershoot on their TRIM expectations and well, there's a possible breach of the minimum threshold.

    Edit to clarify - I'm not a professional Bank analyst so the above could be completely wrong
     
    Last edited: 5 Dec 2018
  3. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    37,055
    Hi Andy

    That is my point. They have already provided €400m against €1.3 billion of loans. They should not need to make a further €300m provision which is what the Central Bank wanted them to do. The only way they could avoid this was to sell the mortgages.

    Brendan
     
  4. Andy836

    Andy836 Frequent Poster

    Posts:
    364
    Of course they need to take the extra €300mm (if that's the figure). The warehoused portion needs to be completely written off for the loans not to be considered NPLs.
    Otherwise they are attributing a book value to a zero interest home loan to a Borrower with impaired credit.
    The house might be worth more than the debt in most cases but that doesn't change the fact the loans are not performing.
     
  5. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    37,055
    But that is the point at issue.
    Of course a provision should be made. But I thought you and I had agreed that the existing provision is about right.

    To write off a further €300m is crazy.

    Brendan
     
  6. Delboy

    Delboy Frequent Poster

    Posts:
    1,552
    And that 5% allows the newly established fund to avoid paying any tax as Pearse Doherty so excellently pursued the point at the Finance Committee last week. The aeticle includes the relevant clip from the committee

    https://www.thejournal.ie/taoiseach...tgage-vehicle-not-to-pay-tax-4389095-Dec2018/
     
  7. Andy836

    Andy836 Frequent Poster

    Posts:
    364
    To write off an extra €300mm would be "prudent" in the jesuitical sense. Yes, the requirement is largely driven by accounting practices and regulatory definitions but either a loan is an NPL or it is not.

    Just because you think there is hope value in the warehoused portion, does not mean the loan is now somehow performing. It is not performing. The same way part P&I and part interest loans are also not performing.

    But the key point is, PTSB needs to reduce its NPLs. Whether you, I or anyone else likes it or not, that is the directive they've been given by the CBI & ECB. It only has two options, write-off the balance or sell the loan. They can't afford to write off the balance.
     
  8. Andy836

    Andy836 Frequent Poster

    Posts:
    364
    Excuse me while I get my financial information from a source other than Pearse Doherty. I like him & generally he means well, but he doesn't know what he's talking about.

    The 5% risk retention rule for securitizations has been in place in Europe since 2011. It has nothing to do with tax, it was introduced to insure originators, sponsors etc all had skin in the game.

    Come back to me when he explains what "profits" he's talking about. "Gross interest" paid on debt is not "profit".
     
  9. RedOnion

    RedOnion Frequent Poster

    Posts:
    2,689
    Correct, but it this instance it seems to also have allowed a loophole to be exposed.
     
  10. Andy836

    Andy836 Frequent Poster

    Posts:
    364
    Well calling it a "loophole" is debatable. Why would a gross interest payment be taxed? It is not "profit", it is effectively a revenue payment.

    If you started taxing interest paid to noteholders in securitizations then they would cease to be viable structures for perfectly reasonable transactions.
     
  11. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    37,055
    Hi Andy

    No, it is not a binary decision at all.

    These are profitable loans and ptsb was forced to sell them because the ECB/CBI has a stupid definition.

    Using the term "hope value" underestimates the value of these. They are loans secured on properties. In most cases they are in positive equity. In probably all cases they will be in positive equity in the near to medium term future. And, in most cases, the borrowers' finances will improve and they will be able to move money from the "hope value" warehouse to the main loan.

    You are saying that they are worth nothing. I am saying that they are worth at least what they are on the books and that ptsb should not have been forced to sell them.

    Brendan