Permanent TSB Group Braces for Impact of Falling Interest Rates

Permanent tsb group holdings plc (PTSB) has reported higher profits and income for 2024, but the bank is bracing for the impact of falling interest rates on its net interest income. PTSB's profit before tax for the year rose to €159m from €79m in 2023, while its total income was up 1% to €672m and in line with guidance. However, the bank's net interest income (NII) dipped by 1% to €612m due to a reduction in margins in the second half of the year, which offset higher average interest earning assets.

The reduction in margins can be attributed to PTSB's competitive mortgage offering, which attracted more customers and increased its market share. The bank's mortgage market share increased to 20.2% in the fourth quarter of 2024 and stood at 16.4% for the year. Fixed-rate products accounted for 85% of its new mortgage lending, with green mortgage lending accounting for 43% of all new loans. However, the bank's NII may be impacted in the long term if it continues to maintain lower margins to remain competitive.

To offset the reduction in margins and maintain its NII, PTSB can employ several strategies. First, the bank can focus on diversifying its income streams by growing its Business Banking lending and SME banking book. In 2024, new SME lending increased by 28%, and the bank's share of new mortgage lending market grew to 20.2% in Q4. By diversifying income streams, PTSB can reduce its reliance on interest income and mitigate the impact of margin reductions.

Second, PTSB can continue to focus on acquiring and retaining customer deposits, as this can help offset lower interest margins. In 2024, customer deposits rose by 5% to about €24.1 billion. By increasing deposits, PTSB can maintain its liquidity and funding position, which can help support its lending activities and NII.

Third, PTSB can drive continuous operational efficiencies and prudent cost management to offset the reduction in margins. The bank has announced a voluntary severance scheme expected to generate annualised cost savings of over €20m a year. By reducing costs, PTSB can maintain its profitability and NII despite lower margins.

Fourth, PTSB can differentiate itself through exceptional customer experiences, which can help attract and retain customers. By deepening customer relationships and providing a superior customer experience, PTSB can increase customer loyalty and reduce churn, ultimately supporting its NII.

Fifth, PTSB can invest in digital channels to reduce costs and improve efficiency. By offering more digital services, the bank can attract tech-savvy customers, reduce branch costs, and improve its overall competitiveness in the market.

Sixth, PTSB can continue to grow its green mortgage lending, which accounted for 43% of all new loans in 2024. By focusing on sustainable lending, PTSB can attract environmentally conscious customers and potentially benefit from government incentives or lower funding costs.

In conclusion, while the reduction in margins may impact PTSB's ability to attract and retain customers, particularly in the mortgage market, the bank's competitive mortgage offering and strong customer relationships have helped to mitigate this effect. By implementing the strategies outlined above, PTSB can offset the reduction in margins and maintain its NII, while also positioning itself for long-term growth and success in the Irish market.