Forward Looking Statements

Transcription

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2 Forward Looking Statements This document contains forward looking statements with respect to certain of the Group s plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events that are often beyond the Group s control. For example, the potential exposure of the Group to various types of market risks, such as interest rate risk, foreign exchange rate risk and credit risk. Actual future gains and losses could differ materially from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward looking statements include, but are not limited to, Irish domestic and global economic business conditions, equity and property prices, the impact of competition, inflation and deflation, changes to customers savings, spending and borrowing habits and the Group s success in managing the above factors. As a result, the actual future financial condition and performance of the Group may differ from the targets and goals set out in the forward looking statements. The Group has no obligation to update any forward looking statement contained in this report. Investor and shareholder information and services including these Half Year Reports, are available on-line at

3 Contents permanent tsb Group Holdings plc Overview Financial Highlights 2 Group Chief Executive s Review 3 Business Review Operating and Financial Review 5 Risk Management 19 Responsibility Statement 20 Financial Statements Independent Review Report to permanent tsb Group Holdings plc 21 Condensed Consolidated Financial Statements (unaudited) 22 Notes to the Condensed Consolidated Financial Statements (Unaudited) 29 Page 1

4 Financial Highlights Summary Consolidated Income Statement Half year ended 30 June 2014 Half year ended 30 June 2013 m m Total operating income Total operating expenses (before exceptional items and impairment charges) (181) (138) Operating loss before impairment charges and exceptional items (22) (19) Impairment charges on loans and advances to customers (148) (429) Impairment charges on repossessed assets (1) (1) Operating loss before exceptional items* (171) (449) Exceptional items (net) Loss before taxation Taxation Loss for the period (171) (131) (29) (10) (200) (141) Group Performance Metrics Net Interest Margin % (Pre government guarantee fees) 0.88% 0.82% Impairment charges by portfolio ROI residential mortgages UK residential mortgages Commercial mortgages Consumer finance (3) 8 Impairment charges on loans and advances to customers Key Balance Sheet and Funding Metrics 30 June December 2013 m m Total shareholders' funds 2,175 2,384 Total assets 36,994 37,601 Total net loans and advances to customers (including held for sale loans and advances 28,983 29,461 to customers) Impairment provisions (4,106) (4,035) Impairment provisions % 12.4% 12.0% Total customer deposits 20,545 19,511 Funding from monetary authorities 5,801 6,940 Wholesale funding 7,467 7,894 Loan to deposit ratio ("LDR") 141% 151% Regulatory capital Available regulatory capital 2,295 2,513 Risk weighted assets 16,070 16,953 Common Equity Tier 1 ratio 12.7% 13.4% Total capital ratio 14.3% 14.8% *"Underlying losses" relates to operating loss before exceptional items Page 2

5 Group Chief Executive s Review The Group s first half results are very encouraging is set to mark an important milestone as the year in which we will report a sharp improvement in underlying losses for the first time since The focus for the Group in 2013 was to re-establish our presence as a competitive, best-in-class retail bank and I am pleased to say that this momentum has continued in the first half of Having completed the restructure of the Group in the last two years, we are now firmly focused on delivering on the strategic business agenda. These 2014 first half results demonstrate that our strategy for stabilisation and recovery is working. Core Bank: Permanent tsb Business Unit ( ptsb ) The Group s vision is firmly fixed on creating a best-in-class Irish retail bank. I believe we have come a long way in that journey since we started in February The strong growth in Current Accounts in 2013 has continued through into 2014; in particular, the exit of certain competitors created additional opportunities to recruit large numbers of new customers. We believe that ptsb has performed considerably stronger than its peer group in winning over customers from departing institutions. We have opened over 15,000 payroll current accounts in 2014 so far and Retail Current Account balances have grown by c. 250m. Retail Deposit volumes increased by c. 330m which represents a market share of 13%, while pricing continues to normalise downwards. In the first half of 2014, ptsb has approved more than 264m in Mortgage Lending representing an increase of c.280% from Drawdowns in this six month period amounted to 180m, representing a market share of 13%. We continue to innovate and our new Tracker Mover product has been well received by the market. This is one of a number of steps we are taking to improve the yield on our historic asset base. We have also announced our entry into the SME market and hope to launch formally in the second half of Personal Term Lending and Credit Cards have also shown growth by c.16% from We will continue to expand our customer proposition over the rest of 2014, extending our offering of innovative products and improving service levels and functionality that will enhance a customer s experience when banking with us. Asset Management Unit ( AMU ) At the AMU, we have built up capability and have deepened our understanding of the 23,000 Irish customers who are in arrears. This places us in a better position both to work with customers and to make the right decisions for them and the Group. Within the portfolios managed by the AMU Irish Home Loans and Buy-to-Let mortgages the underlying arrears levels are now falling, across both early and late arrears. The effectiveness of the AMU s work can be seen in the fact that total cases over 90 days in the Home Loan and Buy-to-Let portfolios are now c.14% below their peak levels in We have met, and in some cases exceeded, all our own targets for arrears resolution and those of the Central Bank of Ireland s Mortgage Arrears Resolution Strategies ( MARS ) process. As a result of the improving quality of the loan book, which is driven by the falling levels of arrears and improvements in macro-economic factors, the flow of impairment charge is reducing and consequently the first half of 2014 is down by 66% compared to the first half of We are keenly focused on finishing 2014 on a high with respect to the AMU s performance, ensuring as many arrears treatments are provided to customers as possible, putting them on a sustainable path to recovery. Non-Core Bank: Non-Core Ireland The Group s Non-Core Ireland Business Unit consists of Springboard Mortgages, Commercial Real Estate ( CRE ) Books and Geared Property Loans. It has become clear to us that investor interest in acquiring these portfolios has grown sharply in the last 18 months and we will deleverage these assets if the economics of a transaction make commercial sense. Non-Core UK The Non-Core UK Business Unit, which primarily consists of Capital Home Loans in the UK, continues to be managed for value. While these loans are lower yielding, they are of good credit quality. The arrears levels within this book are lower than the industry benchmark in the UK and we are also seeing increased levels of redemptions within this loan book as the UK economy recovers. The Group will seek to deleverage these assets over time, but only at prices that satisfy our requirements. Page 3

6 Group Chief Executive s Review Financial Performance Headlines Group Performance On an underlying basis, the Group reported an Operating Loss Before Exceptional Items of 171m in the first half of 2014 (2013: 449m), representing an improvement of 62%. The Group Net Interest Margin improved by 6 basis points despite continuous ECB rate reductions over the last 12 months. We recognise that our Net Interest Margin needs to increase at a faster pace. Economic recovery and normal banking practices are, of course, important factors; however, the key driver is liability and asset mix where the average cost of funds, the extent of our Tracker Mortgage exposure and the quantum of Non-Core books in particular, in the UK provide a drag at a Group level. It is Management s responsibility to manage within these constraints and we continue to make every effort to overcome these challenges. Operating expenses before exceptional items increased by 31% primarily driven by provision for legacy legal and compliance liabilities and the increased cost of regulation. Impairment charges were down by 66% compared to 2013, which is mainly driven by reducing levels of arrears across the Irish Home Loan and Buy-To-Let portfolios and also reduced impairment charges in the Commercial Real Estate book. We continue to be conservative and use a House Price Index with a peak to trough fall of 55% in our provisioning models although CSO index has fallen to 43%. The Group s Common Equity Tier 1 ratio (transitional basis) at 30 June 2014 stood at 12.7% (31 December 2013: 13.1%). Capital attrition is slowing as loss levels reduce. The Group s funding position has continued to improve in the first half of Customer accounts now represent 60% (31 December 2013: 56%) of the Group s total funding with ECB borrowings falling further from 6.9bn in December 2013 to 5.8bn at 30 June 2014 which now represents 17% (31 December 2013: 20%) of the Group s total non-equity funding. This was achieved through deposit growth, reductions in debt securities held and an on-going reduction in historic loan book levels. The Group expects that this position will be further assisted by planned deleveraging of Non-Core Ireland business unit assets, continuing natural pay down of the Non-Core UK business unit and any further NAMA redemptions. The Loans-to-Deposits Ratio for the Group stood at 141% (31 December 2013: 151%); Core Bank, including ptsb and the AMU was 124% (31 December 2013: 129%). Business Unit Performance Core Bank: ptsb reported an Operating Profit of 3m with a NIM of 1.40% compared to an Operating Loss of 39m in the first half of 2013 (NIM of 0.95%). The AMU reported a loss of 116m, representing a reduction of 65% compared to We expect this loss to narrow further into the second half of 2014 and beyond with continuing falls in new defaults and arrears levels, and as forborne loans are cured. Non-Core Bank The Non-Core business reported a loss of 67m compared to 90m in Single Supervisory Mechanism Preparations As has been publicised, preparations for the introduction of the Single Supervisory Mechanism ( SSM ) have commenced. In common with other banks due to see this change in regulation, the Group is undergoing a Comprehensive Assessment ( CA ). This encompasses an Asset Quality Review ( AQR ), a Stress Test and Supervisory Risk Assessment ( SRA ) specific to CA. All banks involved in this process continue to engage with the relevant National Competent Authorities in preparing and completing these assessments. The outcome and consequences of the CA are uncertain and it is expected that the results will be published in the fourth quarter of Outlook The economic and commercial environment continues to improve and this provides an increasingly positive backdrop to the execution of our strategy. We are delivering on our strategic and business objectives and our first half results offer very encouraging evidence of the real, tangible progress we are making. My colleagues and I remain focused on improving and strengthening our position in the Irish domestic market, continuing to work with customers in financial difficulties, professionally managing our non-core portfolios for value maximisation and returning the Core Bank to sustainable profitability and being an investible entity. Having laid the foundations in 2012 and 2013, we believe that we have now entered a much more positive phase in the Group s history. Jeremy Masding Group Chief Executive 18 August 2014 Page 4

7 Operating and Financial Review Summary Consolidated Income Statement Half Year ended 30 June June 2013 Change m m % Net interest income (before ELG fees) % ELG fees (32) (63) -49.2% Net other income % Total operating income % Total operating expenses (excl. exceptional items) (181) (138) 31.2% Operating loss before impairment charges and exceptional items (22) (19) 15.8% Impairment charges on loans and advances to customers (148) (429) -65.5% Impairment charges on repossessed assets (1) (1) 0.0% Operating loss before exceptional items (171) (449) -61.9% Exceptional items (net) % - Restructuring costs - (9) % - Impact of the wind-up of the defined benefit pension schemes % Loss before taxation (171) (131) 30.5% Taxation (29) (10) 190.0% Loss for the period (200) (141) 41.8% Financial Performance Headlines Net interest income (pre-elg) increased by 1.3% for the six months to 30 June 2014 to 158m. This increase is mainly driven by an increase in NIM of 6 basis points more than offsetting a 5.2% decrease in interest earning assets. Net other income of 33m is a 27% increase compared to six months to 30 June The main drivers of this increase are increases in net fees and commissions of 4m during the period and a gain on the disposal of certain CRE loans. Total operating expenses (excluding exceptional items) at 181m for the six months to 30 June 2014 represents a 43m increase compared to six months to 30 June 2013 which is mainly due to increased costs of ongoing regulatory work under the Single Supervisory Mechanism ( SSM ) comprehensive assessment and the cost of legacy legal and compliance issues. Impairment charge on loans and advances to customers of 148m is 66% lower for the six months to 30 June 2014 compared to the six months to 30 June This reflects the success of the Group in dealing with arrears and providing forbearance treatments where possible resulting in a fall in early and late arrears across all portfolios. This improvement in arrears is further assisted by the improving macroeconomic and commercial environment, and provision write-backs in some instances. Exceptional items: The Group had no exceptional items in the current period. For the six months to 30 June 2013, exceptional items were 318m which included a 327m credit following the wind-up of the defined benefit pension schemes in Page 5

8 Operating and Financial Review Net Interest Income Half year ended 30 June June 2013 Change m m % Net interest income (Pre-ELG fee) % Total average interest earning assets 36,079 38, % Net interest margin (NIM %) 0.88% 0.82% 6 bps Net interest income (Pre-ELG) at 30 June 2014 has increased by 1.3% on the prior year to 158m. This increase is due to the reduction in cost of funds to the Group leading to a 6 bps increase in net interest margin which is offset by the reduction in interest earning assets by 5.2% Net Interest Margin NIM movement since June 2013 Including ELG, net interest income for the six months to 30 June 2014 was 126m (30 June 2013: 93m). The ELG fees for the six months to the 30 June 2014 reduced by 49% to 32m (30 June 2013: 63m). The liabilities covered under the scheme decreased to 6.3bn from 7.4bn at 31 December The ELG fee will continue to further decrease as covered liabilities mature following the ending of the scheme in March Average Interest Earning Assets Average interest earning assets have decreased by 1,970m in the six months to 30 June This is split equally between lending and non-lending assets. Average ROI and UK residential mortgage balances decreased by 1.0bn compared to the prior period due to redemptions and repayments being higher than new lending. Commercial lending has decreased 0.3bn within the six months to 30 June Average non-lending interest earning assets have decreased by 0.7bn in the period due to reductions in the levels of debt securities held primarily following the redemption of 0.5bn of NAMA bonds. The Group s net interest margin (before ELG costs) increased six basis points from 0.82% at 30 June 2013 to 0.88% at 30 June The key drivers of the movement were as follows: Asset pricing: A 19bps decrease in margin is primarily due to the two ECB rate reductions of 0.25% effective from May and November Deposit Funding Costs: The ongoing reduction in the costs associated with corporate and retail deposits contributed 20bps to NIM improvement. This is made up of a combination of a 35bps decrease in funding price which is offset by a 15bps increase as the Group replaces ECB funding with more expensive market funding. ECB Funding Costs: The two 25bps cuts in the ECB base rate during 2013 have contributed 12bps to NIM through lower funding costs although this is more than offset by tracker yields as shown above. Wholesale Funding Costs: The fall of 7bps in wholesale funding is due to accelerated interest income in the six months to 30 June 2013 following the early redemption of bonds in IBRC in early Page 6

9 Operating and Financial Review Net Other Income Net other income comprises retail banking fees including current account fees, insurance and foreign exchange commission, realised gains and losses on sale of debt securities, loans and advances to customers and other treasury income. Net other income to 30 June 2014 was 33m (30 June 2013: 26m) and is summarised as follows: Half year ended 30 June June 2013 Change m m % Fees and commission income % Fees and commission expenses (8) (6) 33.3% Net fees and commission income % (Loss)/gain on debt buy-back (4) % Gain/(loss) on disposal of other debt securities % Gain on disposal of Government gilts % Recoveries on loans and advances to customers % Gain on disposal of certain CRE loans and advances % Other 6 (2) % Net other income % Net fees and commissions of 22m are 4m higher than the six months to 30 June 2013 largely due to increased levels of activity on ancillary services offered to customers. A loss of 4m was realised in the period on the buy-back of debt securities issued by the Group which is offset by a gain of 3m on the disposal of debt securities. Also in the 6 months to the 30 June 2014 the Group recognised a profit of 4m on the sale of certain CRE loans and advances and a gain of 2m on recoveries on loans and advances previously written off. Total Operating Expenses (excluding exceptional items) Half year ended 30 June June 2013 Change m m % Staff related expenses (excluding pension expenses) % Staff pension expenses % Total staff related expenses % Depreciation and amortisation % Other administrative expenses % Total operating expenses % Average staff numbers 2,162 2, % Total operating expenses increased by 31.2% on the prior period to 181m. This was driven by a 4.3% decrease in staff costs offset by a 76.7% increase in other administrative costs. Staff related expenses: The Group has reduced total staff related expenses by 4.3% in the six months to 30 June This is due to a decrease in average staff numbers of 3% to 2,162 for the six months to 30 June 2014 and the savings generated following the restructure of the pension entitlements of the staff. Other Administrative Costs: Other administrative costs have increased by 46m to 106m. This is mainly due to a provision for legacy legal and compliance related liabilities and the increased costs of regulation under the new European wide Single Supervisory Mechanism. Refer to note 19 for further details. The Bank levy introduced through the 2013 Finance Act is payable in the second half of This is estimated to cost the Group between 25m and 30m for the full year 2014 and will be recognised in the income statement when it becomes payable. Page 7

10 Operating and Financial Review Impairment charges The charge for impairment provisions on loans and advances to customers for the six months to 30 June 2014 was 148m (30 June 2013: 429m) which represents 66% decrease compared to the six months to 30 June The charge is analysed across the loan portfolios as follows: Half year ended 30 June June 2013 Change m m % ROI Residential mortgages - Home Loans % - Buy-to-lets (14) % % UK Residential mortgages - Home Loans % - Buy-to-let % % Commercial mortgages % Consumer finance (3) % Total impairment charge % During 2014, the Group impairment provisions have begun to normalise. This is driven by a fall in both early and late arrears across all loan portfolios. In addition during 2013, the Group was in the process of updating its provision methodology to align with Central Bank guidelines and this caused higher levels of impairments during that period. The progress made by the Group in dealing with early and late arrears has also impacted on the fall in the impairment charge. Higher prior year charge associated with the change in provisioning methodology, the benefits from the rollout of effective arrears management strategies and the improving economic environment have reduced the ROI residential mortgages and commercial real estate charges by 45.8% and 73.6% respectively. The UK mortgages recorded an increase in the impairment charge by 8m which was due to new loan workout strategies put in place in the first half of However, this additional charge is viewed as one off with the underlying trend showing a continuing reduction. The consumer finance portfolio has seen a write back of provisions of 3m during the period which was due to the improvements in default levels in this portfolio. Repossessed Assets An impairment provision of 1m (30 June 2013: 1m) was incurred in respect of the write-down of the carrying value of repossessed properties to their estimated recoverable amount. Page 8

11 Operating and Financial Review Exceptional Items Exceptional items in the six months to the 30 June 2014 amounted to nil (30 June 2013: 318m). The details for the prior period are analysed below: Half year ended 30 June June 2013 Change m m % Other restructuring costs - (9) % Total restructuring costs - (9) % Impact on wind-up of pension schemes % Exceptional items (net) % During the six months to 30 June 2013, a one off exceptional gain of 327m was recognised in respect of the pensions scheme wind-up. Taxation The taxation charge for the six months to 30 June 2014 was 29m (2013: 10m). Page 9

12 Operating and Financial Review Segmental Performance The performance for the three SBUs together with the geographical split of the Non-Core segment for 30 June 2014 and 30 June 2013 are provided below: Half year ended 30 June 2014 Income statement Core Bank Non-core Bank Non-core of which is Unallocated ptsb AMU assets UK adjustments* Total m m m m m Total net interest income / expenses 138 (17) (6) (4) Other operating income (2) 33 Total operating income 170 (17) (3) (4) Total operating expenses (108) (57) (16) (5) - (181) Operating profit / (loss) before provisions for impairments 62 (74) (19) (9) 9 (22) Impairments of loans and advances and repossessed assets (59) (42) (48) (18) - (149) Operating (loss) / profit 3 (116) (67) (27) 9 (171) NIM 1.40% (0.52%) (0.12%) Balance Sheet Loans and advances to customers (Gross) 14,138 8,840 10,111 Loans and advances to customers (Net) 13,838 6,428 8,717 Non performing loans ("NPLs") 691 5,421 2,421 Provisions Coverage Ratio ("PCR") 43.4% 44.5% 57.6% *The unallocated adjustments relates to intragroup fund transfer pricing recharges to the AMU and the Non-Core segments. Half year ended 30 June 2013 Income statement Core Bank Non-core Bank Non-core of which is Unallocated ptsb AMU assets UK adjustments* Total m m m m m Total net interest income / expenses Other operating income Total operating income Total operating expenses (105) (24) (9) (5) - (138) Operating profit / (loss) before provisions for impairments (12) (22) (19) Impairments of loans and advances and repossessed assets (27) (307) (96) (11) - (430) Operating (loss) / profit (39) (329) (90) (7) 9 (449) NIM 0.95% 0.19% 0.14% Balance Sheet Loans and advances to customers (Gross) 14,659 8,757 10,080 Loans and advances to customers (Net) 14,346 6,411 8,704 Non performing loans ("NPLs") 504 5,610 2,438 Provisions Coverage Ratio ("PCR") 62.1% 41.8% 56.4% The results of the segments are analysed in detail on the following page. Page 10

13 Operating and Financial Review ptsb SBU ptsb SBU focuses on Irish retail consumer business with a gross loan portfolio of 14.1bn largely consisting of performing ROI residential mortgages and a debt securities portfolio of 5bn, primarily funded by customer deposits and wholesale market funding. ptsb SBU targets mainstream Irish retail personal and non-personal customers and offers a comprehensive range of retail banking products including deposit accounts, current accounts, mortgages and consumer finance through multiple channels. ptsb SBU reported net interest income of 138m, an increase of 71m from the prior period. This was due to lower cost of ELG as covered liabilities decrease and a lower cost of funds from the prior period. The NIM (pre-elg fees) is 1.40% with an operating profit of 3m for the six months to 30 June 2014 which is an increase of 42m. This is largely driven by the improvement in the net interest income line. Included in the operating profit is an impairment charge of 59m which equates to 42bps of gross loans. The Non performing loans ( NPLs ) have increased to 691m with a provision coverage ratio ( PCR ) of 43.4%. The movement during the period is due to new default flows. AMU SBU The AMU SBU manages a gross loan portfolio of 9bn of non-performing home loan, buy-to-let and unsecured loan portfolios in the Republic of Ireland. AMU SBU reported a loss of 116m for the six months to 30 June The loss has decreased by 213m from 30 June 2013, this is largely driven by a reduction in the impairment charge of 265m. During the current period the AMU has made significant progress in dealing with early and late arrears in the portfolio with both falling in the six months to 30 June The NPLs have decreased to 5,421m. This is a decrease of 3.4% which highlights the progress made in finding sustainable solutions for customers in difficulty. The PCR has increased by 2.7 percentage points during the period to 44.5%. Non-Core SBU The Non-Core SBU which has a gross loan portfolio of 10bn comprises of CHL (a UK residential mortgages business), the Group s commercial real estate mortgage portfolio, a smaller deposit business in IOM operated through the Group's subsidiary, Permanent Bank International Limited (PBIL) and a number of smaller loan portfolios, all closed for new business, except PBIL. Non-Core SBU reported a loss of 67m for the six months to 30 June This loss for the period, which has fallen 23m from the prior period, is primarily driven by the decreased impairment charges which were elevated in the period to 30 June 2013 due to an alignment of the impairment methodology with CBI guidelines. The NPLs have decreased to 2,421m. This is a decrease of 1% which is due to progress made in finding sustainable solutions for customers in difficulty together with sale of certain loan and advances to customers. The PCR has increased by 1.2 percentage points during the period to 57.6%. Further details on these segments are provided in note 2 to the financial statements. Page 11

14 Operating and Financial Review Summary Consolidated Statement of Financial Position 30 June December 2013 Change m m % Assets ROI home loans 15,226 15, % ROI buy-to-let 5,118 5, % Total ROI residential mortgages 20,344 21, % UK home loans % UK buy-to-let 6,328 6, % Total UK residential mortgages 6,716 6, % Commercial mortgages 1,150 1, % Consumer Finance % Total loans and advances to customers 28,456 29, % Loans and advances to banks 1,764 1, % Debt securities 5,274 5, % Other assets 973 1, % Assets held for sale % Total assets 36,994 37, % Liabilities and equity Retail current accounts 2,421 2, % Retail deposits 12,109 11, % Corporate & institutional deposits 6,015 5, % Total customer accounts 20,545 19, % Deposits by ECB 5,801 6, % Deposits by banks and other financial institutions 3,594 3, % Deposits by banks 9,395 10, % Debt Securities in issue 3,873 4, % Subordinated liabilities % Other liabilities % Total liabilities 34,819 35, % Total equity 2,175 2, % Total equity and liabilities 36,994 37, % The Group has increased its funding from customer deposits by 5% to 20.5bn through continued deposit growth resulting in reduced reliance on ECB funding which was down by 16% in the six months to 30 June ECB funding makes up 16.9% of total funding required by the Group reducing from 19.9% at 31 December The reduction in total asset base of the Group by 0.6bn in the six months to 30 June 2014 was predominantly driven by the reduction in NAMA bonds and loans and advances to customers. ROI residential mortgages ROI residential mortgages represent 71% of the total net loans and advances to customers (31 December 2013: 72%). 75% of these loans are home loans with 25% consisting of buy-to-let mortgages. The ROI residential mortgages fell by 0.8bn in the six months to 30 June This was due to transfer of 0.3bn of loans and advances to customers to the held for sale category on the statement of financial position. A combination of an increase in impairment provisions by 0.1bn during the year and net repayments of 0.3bn (30 June 2013: 0.4bn) accounts for the majority of the remaining movement. UK Residential Mortgages UK mortgages, which remain closed to new business, reduced from 5.3bn to 5.2bn in the period to 30 June This is due to repayments of 0.07bn and an additional 0.03bn being classified as held for sale. At 30 June 2014, 180m/ 225m of this portfolio was classified as held for sale. This increased from 150m/ 180m at 31 December This classification reflects the Group s decision to reduce its exposure to UK mortgages. Commercial mortgages The commercial real estate portfolio was closed to new business in The loan portfolio has fallen by 0.1bn which is due to an increase in impairment provisions of 0.02bn with the remainder related to repayments. Consumer finance The consumer finance portfolio, which mainly includes credit cards and unsecured personal lending, decreased by 14m in the six months to 30 June This is mainly due to repayments during the period. Page 12

15 Operating and Financial Review Loans and advances to banks Loans and advances to banks consists of restricted cash held by the securitisation entities of 0.7bn, cash held at central bank of 0.2bn, cash collateral placed with counterparties relating to net derivative positions of 0.5bn with the remainder held with other banks. Debt securities The debt securities comprise 3.3bn of government bonds, 1.6bn of NAMA bonds and other bank and corporate bonds of 0.4bn. The portfolio reduced by 0.5bn during the six months to 30 June 2014 with redemption of 0.5bn of NAMA bonds. Customer accounts Customer accounts, which include both retail and corporate term, notice and demand accounts as well as current accounts, grew to 20.5bn at 30 June 2014, an increase of 1bn. Retail deposits including current accounts increased by 0.6bn in the six months to 30 June This represents continued strong performance created from additional opportunities from the exit of certain competitors and the fee free current account gaining further popularity in this market. An increase of 0.5bn in corporate deposits in the six months to 30 June 2014 reflects a significant increase from 31 December This highlights the increased confidence in the Irish economy and consequently in permanent tsb. Deposits by banks Deposits by ECB reduced by 1.1bn reflecting the on-going management of the funding mix supported by strong growth in customer accounts, together with a reduction in the total assets base requiring funding. ECB funding makes up 16.9% of total funding required by the Group reducing from 19.9% at 31 December Deposits by banks and other institutions remained broadly in line with those at 31 December Debt Securities in Issue Debt securities in issue fell by 0.3bn in the six months to 30 June This is due to a buyback of 0.2bn during the period and maturities of previously issued securities of 0.1bn during the year. Page 13

16 Operating and Financial Review Regulatory capital The Group s Basel II regulatory capital position is at 30 June 2014 summarised as follows: 30 June December 2013 Change m m % Qualifying Tier 1 capital 2,048 2, % Qualifying Tier 2 capital % Qualifying Tier 1 and Tier 2 capital/total own funds 2,295 2, % Total required Capital 1,286 1, % Total RWA 16,070 16, % Capital ratios: Common Equity Tier 1 capital ratio 12.7% 13.4% -0.7 ppts Total capital ratio 14.3% 14.8% -0.5 ppts The Group s common equity tier 1 capital ratio at 30 June 2014 is 12.7% (31 December 2013: 13.4%. This compares to a regulatory capital minimum of 8%. The total capital ratio at 30 June 2014 stood at 14.3% (31 December 2013: 14.8%). Movements in these ratios are primarily due to losses recorded during the six month to 30 June The total available capital fell by 0.22bn which included 0.17bn of Tier 1 capital and 0.05bn of Tier 2 capital in the six months to 30 June Reduction in Common Equity Tier 1 capital is mainly due to losses recorded during the six months to 30 June 2014 which is partially offset by the decrease in risk weighted assets. RWAs decreased by 0.9bn in the six month to 30 June This can be attributed to the reductions in the loans and advances to customers and the reduction in Probability of Default ( PDs ) as the economy recovers. The Group s capital management framework and further analysis of regulatory capital calculations are set out in note 36 to the Annual Report. As noted in the 2013 Annual report, there was a significant review of risk weightings across the book as part of the 2013 Balance Sheet Assessment (BSA). This led to an additional amount of RWAs being added of 3.4bn. Page 14

17 Operating and Financial Review Funding Group funding profile 30 June December 2013 Change m m % Customer accounts 20,545 19, % Long-term funding 11,561 12, % ECB funding > 1 year to maturity 4,256 5, % Debt securities in issue 3,873 4, % Deposits by banks 3,040 3, % Subordinated liabilities % Short-term funding 2,099 2, % ECB funding < 1 year to maturity 1,545 1, % Other short-term debt % Total interest bearing liabilities 34,205 34, % ECB funding as a % of total funding 17% 20% -3.0% Funding mix Customer accounts 60% 56% 4 ppts Long-term funding 34% 36% -2 ppts Short-term funding 6% 8% -2 ppts 100% 100% Customer accounts Growth in deposits has seen the Group satisfy an increasing proportion of its funding requirements from retail, corporate and institutional customer deposits. Customer accounts accounted for 60% of total funding at 30 June 2014, compared to 56% as at 31 December Long term funding Long term funding consists of debt with an original maturity or call date of greater than 12 months (although remaining maturity date may be less, please see note 24 for details). This includes ECB funding drawn under the Long Term Refinancing Operations ( LTRO ) programme of 4.3bn, bonds and medium-term notes of 2.3bn, non-recourse funding, which consists of 1.6bn collateralised on Irish residential mortgages and subordinated liabilities which includes 0.4bn of convertible contingent capital notes. Long term debt accounted for 34% of total funding at 30 June 2014, compared to 36% at 31 December This reduction is mainly due to repayments of 0.8bn funds received under the LTRO programme. Short term funding Short term funding consists of debt with an original maturity or call date of less than 12 months. This represents 1.5bn of funds received under the Special Mortgage Backed Promissory Notes programme ( SMBPN ). Contractual maturities of these liabilities have been provided in the liquidity risk section of note 24 to the financial statements. ECB funding ECB funding of total funding requirements of the Group has reduced by 3% to 17%. ECB funding is secured under the LTRO SMBPN programmes. The requirements for ECB funding have reduced as the Group meets its funding needs in the markets as the size of the statement of financial position reduces. Page 15

18 Operating and Financial Review Asset Quality Asset quality of loans and advances to banks, derivative assets and debt securities are analysed in detail in the credit risk section of note 24 to the financial statements. Loans and advances to customers (including assets held for sale) The Group classifies loans and advances to customers as neither past due nor impaired, past due but not impaired and impaired in line with the requirements of IFRS 7 and defines them as follows: Loans which are neither past due nor impaired are analysed as excellent, satisfactory or fair according to their IRB ratings. Past due but not impaired is defined as loans where repayment of interest and / or principal are overdue by at least one day but which are not impaired. A loan is considered impaired when there is objective evidence of impairment where the loan is greater than 90 days in arrears and the present value of future cash flows is less than the carrying value of the loan (for residential mortgages this is typically where the indexed LTV is >80%) requiring a specific provision to be recognised in the income statement. 30 June 2014 ROI residential mortgages UK residential mortgages Commercial Consumer Finance Total m m m m m Neither past due nor impaired 16,110 6, ,619 Past due but not impaired 1, ,360 Impaired 6, , ,110 Gross loans 23,659 7,028 2, ,089 Impairment provisions (3,013) (87) (929) (77) (4,106) Net loans 20,646 6,941 1, ,983 Impaired 6, , ,110 > 90 days past due but not impaired NPLs* 6, , ,533 NPLs as % of gross loans 29% 3% 69% 24% 26% Provisions coverage ratio ("PCR")** 44% 36% 65% 97% 48% 31 December 2013 *Restated ROI residential UK residential Commercial Consumer Finance Total m m m m m Neither past due nor impaired 16,344 6, ,794 Past due but not impaired 1, ,817 Impaired 6, , ,885 Gross loans 24,070 6,962 2, ,496 Impairment provisions (2,950) (76) (911) (98) (4,035) Net loans 21,120 6,886 1, ,461 Impaired 6, , ,885 > 90 days past due but not impaired NPLs* 6, , ,552 NPLs as % of gross loans 28% 4% 69% 28% 26% Provisions coverage ratio ("PCR")** 44% 31% 63% 97% 47% *The prior year table has been restated to reflect reclassification to assist in comparability with the current period. *Non-performing loans are defined as impaired loans together with loans which are greater than 90 days in arrears but not impaired. **Provisions coverage ratio is calculated as impairment provisions as a percentage of non-performing loans. Page 16

19 Operating and Financial Review Loans which are neither past due nor impaired, before provision for impairment losses, amounted to 23.6bn (30 June 2014: 23.8bn) or 71% of the loan book which is in line with the prior year 31 December As at 30 June 2014, 1.4bn or 4% of the loan portfolios are within the past due but not impaired loans category compared to 1.8bn or 5% as at 31 December Impaired loan balances as at 30 June 2014 were 8.1bn or 25% of the total loan book (31 December 2013: 7.9bn or 24%). The impaired loans have increased by 3% in the six months to 30 June 2014 which shows a significant slowdown in the growth of impaired balances from the 12 months to the year ended 31 December 2013 when impaired balances grew by 27%. Impairment provisions were 4.1bn at 30 June 2014 compared to 4.0bn at 31 December This is an increase in the period of 3%. The ROI residential portfolio has shown an increase of 0.3bn in the impaired loan balances while all other portfolios have shown a decline. This highlights the Groups progress made in stemming the flow of early arrears while managing the late arrears in the individual portfolios. While the overall NPLs have remained static at 26% of total gross loans, the overall PCR for the portfolio has increased by 1 ppt to 48% at 30 June ROI residential mortgages Home loans 30 June December 2013 Change m m % Neither past due nor impaired 11,983 12, % Past due but not impaired 847 1, % Impaired 4,446 4, % Gross loans 17,276 17, % Impairment provisions (1,758) (1,661) 5.8% Net loans 15,518 15, % Impaired 4,446 4, % > 90 days past due but not impaired % NPLs 4,681 4, % NPLs as % of gross loans 27% 26% 1 ppts Provisions coverage ratio ("PCR") 38% 37% 1 ppts Total cases # 139, , % Early arrears (0-90 days) # 6,041 7, % Early arrears (0-90 days) % 4.3% 5.0% -0.7 ppts Late arrears (over 90 days) # 19,009 22, % Late arrears (over 90 days) % 13.7% 15.8% -2.1 ppts Weighted average LTV % 105% 108% -3 ppts Home loans represent 73% of the total gross ROI residential mortgage portfolio. During 2014, Home loan NPLs have stabilised at 27% while impairment provisions increased by 5.8% and provision coverage ratio increased marginally by 1ppt. In 2014, home loans early arrears cases, which represented 4.3% of total cases, reduced by 0.7% when compared to 31 December Late arrears cases, which represented 13.7%, decreased by 15.3% when compared to 31 December This highlights the progress made in dealing with early and late arrears cases by the AMU. The weighted average LTV has reduced from 108% at 31 December 2013 to 105% in 30 June 2014 mainly due to an improvement in the CSO house price index. The index improved by 12.5 ppts in the 6 months to 30 June Further details are provided in note 24 to the financial statements. Excluding NPLs the weighted average LTV has reduced from 108% to 95% during the six months to 30 June Page 17

20 Operating and Financial Review ROI residential mortgages Buy-to-let loans 30 June December 2013 Change m m % Neither past due nor impaired 4,127 4, % Past due but not impaired % Impaired 2,083 2, % Gross loans 6,383 6, % Impairment provisions (1,255) (1,289) -2.6% Net loans 5,128 5, % Impaired 2,083 2, % > 90 days past due but not impaired % NPLs 2,094 2, % NPLs as % of gross loans 33% 35% -2 ppts Provisions coverage ratio ("PCR") 60% 58% 2 ppts Total cases # 22,848 23, % Early arrears (0-90 days) # 981 1, % Early arrears (0-90 days) % 4.3% 4.4% -0.1 ppts Late arrears (over 90 days) # 3,550 3, % Late arrears (over 90 days) % 15.5% 16.9% -1.4 ppts Weighted average LTV % 129% 132% -3.0 ppts Buy-to-let loans represent 27% of the total gross ROI residential mortgage portfolio. During 2014, Buy-to-let NPLs have fallen marginally while impairment provisions decreased by 2.6%. As a result, NPLs as a percentage of gross loans decreased by 2 ppts while PCR increased by 2 ppts. In 2014, BTL early arrears cases, which represented c.4.3% of total cases, reduced by 0.1 ppt when compared to 31 December Also, late arrears cases, which represented 15.5%, decreased by 1.4 ppt when compared to 31 December The weighted average LTV has reduced from 132% at 31 December 2013 to 129% in 2014 mainly due to an improvement of 12.5 ppts in the CSO house price index in the six months to 30 June Further details are provided in note 24 to the financial statements. Excluding NPLs the weighted average LTV has reduced from 131% to 118% during the six months to the 30 June UK Residential Mortgages This relates to the Groups UK buy-to-let business CHL which is closed to new business. It represents 21.2% of the total loan portfolio. At 30 June 2014, the NPLs in this portfolio have reduced by 4% while the stock of impairment provisions increased by 14.6bps. This increase in provision stock is due to new loan workout strategies put in place in the first half of Commercial Real Estate Mortgages These represent 6% of the total loan portfolio. At 30 June 2014, the NPLs in this portfolio have remained unchanged while stock of impairment provisions increased by 2% resulting in a slight increase in the PCR. Consumer Finance These represent 1% of the total loan portfolio. At 30 June 2014, the NPLs in this portfolio have reduced by 21.8% while the stock of impairment provisions decreased by 21.4%. This is driven by lower defaults in the portfolio while the AMU has seen recoveries in the portfolio. Page 18

21 Risk Management The Group operates a proactive Enterprise Risk Management ( ERM ) approach in the identification, assessment and management of risk. The Group ERM is designed to ensure that all material risks are identified and managed and the business strategy across the Group is implemented in full recognition of these risks. This Group risk framework underpins profitable and prudent risk taking throughout the Group, details of which are outlined in the Risk Management section of the 2013 Annual Report. There have been no significant changes to the Risk Management Framework since 31 December A detailed analysis of credit and liquidity risk is provided in note 24. Page 19

22 Responsibility statement For the six months ended 30 June 2014 We, being the Board of Directors and persons responsible within permanent tsb Group Holdings plc, confirm that to the best of our knowledge the Half Year Report comprising the condensed consolidated statement of financial position, the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of changes in equity, the condensed consolidated statement of cash flows and the related notes to the condensed financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. On behalf of the Board: Alan Cook Group Chairman Jeremy Masding Group Chief Executive Officer 18 August 201 Page 20

23 Independent review report to permanent tsb Group Holdings plc Report on the condensed consolidated financial statements Our conclusion We have reviewed the condensed consolidated financial statements, defined below, in the Interim Report of permanent tsb Group Holdings plc (the Company ) for the six months ended 30 June Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union. Emphasis of matter Going Concern Without modifying our conclusion, we draw attention to the disclosure made in Note 1.3 to the condensed consolidated financial statements which sets out certain factors, risks and uncertainties which have been considered in the directors assessment of the ability of the group to continue as a going concern. These disclosures set out the group s need for approval of the Restructuring Plan and the group s continued reliance on System Funding, together with the directors assessment of these matters. These matters, together with the other matters set out in Note 1.3 indicate the existence of material uncertainties which may cast significant doubt about the group s ability to continue as a going concern. The condensed consolidated financial statements do not include adjustments that would result if the group were unable to continue as a going concern. This conclusion is to be read in the context of what we say in the remainder of this report. What we have reviewed The condensed consolidated financial statements, which are prepared by permanent tsb Group Holdings plc, comprise: the condensed consolidated statement of financial position as at 30 June 2014; the condensed consolidated income statement and c0ndensed consolidated statement of comprehensive income for the period then ended; the condensed consolidated statement of changes in equity for the period then ended; the condensed consolidated statement of cash flows for the period then ended; and the explanatory notes to the condensed consolidated financial statements. As disclosed in note 1.2, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed consolidated financial statements included in the Interim Report have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as adopted by the European Union. What a review of condensed consolidated financial statements involves We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the United Kingdom and Ireland. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. We have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated financial statements. Responsibilities for the condensed consolidated financial statements and the review Our responsibilities and those of the directors 12 The Interim Report, including the condensed consolidated financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the condensed consolidated financial statements in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union. Our responsibility is to express to the Company a conclusion on the condensed consolidated financial statements in the Interim Report based on our review. This report, including the conclusion, has been prepared for and only for the Company and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. PricewaterhouseCoopers Chartered Accountants Dublin 18 August The maintenance and integrity of the permanent tsb Group Holdings plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the condensed consolidated financial statements since they were initially presented on the website. 2 Legislation in the Republic of Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Page 21