British banking giant NatWest The Group may acquire a significant minority stake in Permanent TSB (PTSB) in a deal to sell a significant portion of the loans and other assets of its Ulster Bank division to an Irish government lender, according to sources familiar with the discussion.
The PTSB is estimated to be interested in approximately € 9 billion from Ulster Bank’s € 20 billion loan portfolio, including untracked mortgages, as well as small business and consumer loans, as well as deposits and part of the UK bank’s branch network.
Analysts estimate that PTSB will need to raise more than € 500 million in additional capital to support such a transaction, which is close to the bank’s current market value of around € 540 million.
In February, the PTSB said it was in talks to buy certain assets and liabilities of Ulster Bank after NatWest confirmed it was downsizing its Republic unit as it struggles to make sufficient profits.
Eamonn CrowleyThe head of the PTSB told reporters last month that the bank will turn to both stock market investors and the government, which owns 75 percent of the group, for cash if it needs to raise capital to buy loans from Ulster Bank.
Crowley told the Oireachtas finance committee this week that the talks with NatWest were “constructive.” He also pointed out that part of the capital deficit can be filled by obtaining loans at a discount.
The chief executive officer is implicitly referring to an accounting method called “bad reputation,” or what is sometimes referred to as negative goodwill, where extraordinary profits are recorded in a business combination where assets are purchased at a discount to fair value.
The European Central Bank (ECB) said earlier this year that it will recognize proven accounting fraud in terms of equity in evaluating transactions, as it insists on consolidating banks at a time when the valuation of bank assets is under pressure. This is until the profits are used to pay dividends to shareholders.
Listed eurozone banks currently trade at only 60% of their book value – or how they value their own assets – amid investor concerns about the impact of lower and longer-term interest rates on lending margins, restrained loan demand and general economic outlook.
The impact of particularly high regulatory capital requirements for Irish banks, a legacy of the financial crisis, has resulted in them trading at an even greater discount. Bank of Ireland as well as AIB currently trading at about 50 percent of their assessed book value for this year, while the PTSB is trading at 27 percent.
The prospect of NatWest, which is almost 55 percent owned by UK taxpayers, will accept a stake in PTSB as a partial payment for a significant portion of Ulster Bank, further reducing the amount of money that PTSB will need to raise. Adopting a potentially 10 to 20 percent equity stake would also reduce the likelihood that NatWest would find itself in trouble if the assets subsequently rose significantly in value.
Representatives of NatWest and PTSB declined to comment.
NatWest’s negotiations on the sale of € 4 billion of corporate and other business loans to Ulster Bank by AIB are more advanced. AIB’s high capital level means that it will not need to raise additional funds to complete the transaction.