In my opening remarks, I will address a number of key issues facing Permanent TSB and, in doing so, give an overview of the challenges facing us and the journey we have begun to respond to those challenges. My colleagues and I appreciate fully the substantial support the Irish taxpayer has given to the group since the financial crisis began. The crisis in Ireland and across the world over the past four years has been unprecedented. Without doubt the behaviour of banks, including my own, in the decade or so before 2008 contributed its part to what subsequently unfolded. The damage which has been caused here in Ireland and in the United Kingdom, Europe and the United States has been profound. Everyone connected with the bank has paid a heavy price over the past four years. Our shareholders have been effectively wiped out and our employees, the majority of whom bear no responsibility whatsoever for any of the mistakes which were made, have suffered significant loss of reputation and respect and many have been obliged to leave their jobs. Most seriously, our customers have suffered financially and in other ways as a consequence of the collapse. Nevertheless, we fully appreciate that were it not for the very strong support of the Government over that time, the damage would have been much greater and the bank would not have been able to continue in operation. Consequently, I again wish to put on record my own appreciation, and that of all my colleagues, for this support.
I took up my new role as chief executive of the bank on 20 February last or approximately 21 weeks ago. The days and weeks since then have been extraordinarily busy as, together with my colleagues, I have worked to address a series of challenges facing the bank. That work has entailed intensive engagement with the Department of Finance, the troika, our regulators, our staff and with our customers, many of whom I have met directly and others who have written to or telephoned me. Most have been exceptionally courteous and have shared their views on their own situations and on the general banking climate with great patience and grace. I will repay that human spirit with an unwavering commitment to rebuild the bank and its reputation. I wish to express my appreciation for the support I have received from each of these stakeholders and in particular from the team in the banking unit in the Department of Finance, which has worked very closely with us over that time. My colleagues and I have had three priorities through the past few months. The first has been to put in place a restructuring plan which would be grounded in clear and objective facts, realistic in its analysis of our current problems clear on the measures we need to take to address them and ambitious in its goal to return the bank to profitability and sustainability without taxpayer support. A second priority has been to begin to tackle the issue of our comparatively high variable rate mortgage products, while a third priority has been to address what we describe generally as the issue of collections, that is, effectively re-engineering and properly resourcing that function to deal with customers in arrears and to work with customers at risk of going into arrears to prevent that from occurring. We have made progress on each of these issues.
First, let me talk about the restructuring plan. To understand what we are trying to achieve with our restructuring plan, and its urgency, one cannot overstate the very perilous position of the bank at the start of this year. As I mentioned earlier, I joined the bank on 20 February and just eight days later, the group issued a profit warning prompted by the need to make provisions for as much as €1.4 billion arising from impairments incurred in 2011. A couple of weeks later, the bank published its results for 2011 and, largely as a result of those impairments, it posted a loss of approximately €424 million or almost half a billion euro. That figure would have been much worse had it not been for a one-off gain of approximately €1 billion, which arose out of a liability management exercise in which the junior bondholders shared some of the burden of our crisis and that, thankfully, has saved the taxpayer about €1 billion. As members know, the starting point for the bank was very grave. We began by reviewing in minute detail every aspect of the bank's operations and its financial performance in order that we could ascertain what areas of the bank were working and what were not and, if we could not save the entire integrated operation, whether there was the essence of a so-called "good" Permanent TSB bank that had a viable future and for which there was a real role in the banking landscape and if so, then in what market segment or segments should this "new" Permanent TSB bank compete.
In April, we had detailed discussions with the troika to discuss what we had found and in particular to ascertain how we could create a viable bank from within the current Permanent TSB business, what the "new" Permanent TSB, for want of a better description, might look like, how we would manage those parts of our business which were not viable and which would not be part of the new bank and the reason we believed creating a "new" Permanent TSB would be worthwhile. Let me be very clear in this regard: we considered all the alternatives, including the outright closure of the bank, an alternative which all agreed could lead to a further, significant destruction of value for the taxpayer. Having reviewed the way forward, the Government, the troika and I believe that creating a viable, customer-focused and competitive bank at Permanent TSB is a worthy goal and one which will benefit consumers in this country. I believe this market will need strong competitors in the years ahead and a viable Permanent TSB bank can be a powerful presence in that context. At the conclusion of these very difficult discussions, the troika encouraged us to flesh out our restructuring plan and submit it to the European Commission at the end of June. We have now done that.
Last week we concluded a second round of discussions with the troika, during which we updated it on the progress made to date and shared the details of the restructuring plan. While the Government and the troika have been very supportive of the group, they also have been clear that their continued support is entirely dependent on our success in implementing the radical change which they, and we, believe is necessary to create a viable institution. They also have emphasised that we must work with the authorities to separate the new Permanent TSB from the asset management unit as there is no viability for the group as an integrated legal entity. Equally importantly, the troika knows, as do I, that there will be no sustainable future as long as we are on the life-support system of ECB funding. To pretend otherwise and to live on the false pretence of deposit and mortgage rates that do not lead to positive returns for the taxpayer, is to subject another generation to taxpayer-funded zombie banks. Rational banking means generating a return on equity based on a positive net interest margin, that is, the difference between the interest received and the interest paid, a cost base that invests in talent, process and controls, as well as normalised impairment rates. The Irish banking market must change.
In respect of my own organisation, the troika has made it very clear that time is of the essence. Our progress will be reviewed and scrutinised when we meet it every quarter, starting in early October. To begin the process of structural change, we will be unveiling within the next week a detailed restructuring plan for the bank. We will set out a new operating model which reflects the focused business which we will become and which resets our operating expenses to reflect that fact. We will run the business through the managerial lens of a new bank and asset management unit, pending a system-driven legal separation. We will significantly reduce the number of branches from 92 at present. That said, we will retain a national presence, ensure the network continues to serve the Irish retail banking market better than our competitors and build out the bank's multichannel distribution capability. We will significantly reconfigure roles and functions in our head office. We will invest significantly in the core functions of banking, such as credit risk, finance and treasury, in order that Permanent TSB is respected for its professionalism and rigour. We will begin to implement the values of performance and accountability so the taxpayer can be confident we are making value-based decisions thus removing, beyond any doubt, any view that we are entitled to the support of the State. We need to earn a place back at the heart of society.
Unfortunately, there will be some job losses through this change programme. However, there also will be some new opportunities; in particular in the area of collections, where we plan to double the number of people working in the coming months. Where jobs are to be lost, we will endeavour to facilitate these through a voluntary severance scheme. When we roll out the details of this plan, we will be stressing to our colleagues that it is not optional. It is the minimum required to secure the future of the bank and the redemption of our profession. Failure to implement it in full and on schedule will jeopardise the future of the bank and the staff within it. This will not be easy for our staff but I believe they understand the context and on that basis they will realise there are no other options.
Our second priority in recent months has been to try to address the issue of the comparatively high interest rates being charged by the bank on variable rate mortgages. It is important to understand that standard variable rate, SVR, mortgages are not our most common mortgage. The average balances of mortgages on SVR - at approximately €70,000 - are much lower than is generally understood. Nevertheless we accept that as a result of decisions taken in 2010 and 2011, Permanent TSB had become an outlier in respect of variable rate mortgages and that is not acceptable.
Here again we have made important progress. At the end of April, within days of receiving positive support from the troika, we announced a unilateral reduction in our variable rates of 50 basis points for home loan mortgages. Last week, when the ECB reduced its rate by 25 basis points, we announced that we would pass on this reduction, plus a further ten basis points, to all variable rate customers, even as many competitors declined to pass on the reduction itself. Combined, these two moves have had the effect of reducing our rates by 85 basis points. It has significantly improved our position compared with our major competitors and we have ended that outlier status.
I understand that some believe our rates are still too high. Based on today's Irish banking market economics - high deposit pricing, high loss rates and high overall funding costs - there is little room to manoeuvre without passing on further burden to the taxpayer. I will not chase down rates to levels that will negatively impact on the already fragile state of the bank and the economy. I am not saying there is no room for further reductions but that, clearly, it is dependent on us working together to create an environment for a rational banking model. Let us develop a normalised market and everybody will benefit.
I think further clarity on the rates issue is very important. Our starting point is that we have a responsibility to re-establish a rational banking model in Permanent TSB. To our mind, a rational banking model starts with the funding side of our balance sheet. Critics say our lending rates are too high, but one does not run a rational bank by setting out one's lending rates and then hoping one can source one's funding and run one's operating cost base to match. One identifies one's costs and they dictate what rates one can set.
As I mentioned previously, we have three components to our costs. First is the high costs we face in raising money to finance our mortgage loans, particularly the high costs of deposits in this country, which are only partially reduced by an amount of relatively cheap money being provided temporarily through the ECB. This is money that is required due to the closure of wholesale markets to the bank but which is not a sustainable source of funding at either price or quantum. Second is the high costs we face in making provisions for those who cannot repay their loans, and that cost is rising as impairments are rising. Third is our operating costs - literally what it costs to operate the bank and, over time, provide a realistic return for our shareholder. I have commented already on the restructuring plan.
I have no desire to run a bank where the rates are dictated by what we believe the market can bear. We have a blended, average cost of funds and that dictates lending product pricing and returns. I hope and think that as we go forward, the costs I have outlined will reduce, particularly the current irrational cost of deposits. If they do, I believe we will be able to reduce our variable rates further, but by the same token, if those costs increase, then we will come under further pressure to raise rates. That is how a rational banking system works and that is the type of system we need to re-establish in this market. Well-regulated competition with this bank playing a core role, will raise standards, drive innovation, reduce taxpayer burden and transfer benefit to the end customer.
The third priority has been in respect of collections and arrears. We are very conscious of the huge toll which the current crisis is exacting on customers who in most cases, through no fault of their own, are struggling or unable to meet their loan repayment commitments. I regard it as a fundamental responsibility of mine and my colleagues to treat any customers in that position with respect, dignity, support and patience. I believe that is the case in our bank.
We are committed to the current MAR process through which we are creating a suite of products to help our customers who have repayment problems, and I believe these can make a very real difference to the challenges facing those customers. We are also committed to doing all in our power to help our customers avoid getting into arrears in the first instance and, where it arises, helping them to correct that situation as quickly as possible.
On the evidence I have seen since joining the bank, I do not believe sufficient priority has been given to this area since the crisis began. Thankfully, that now seems to have come to an end. We are certainly finding that as we engage more deeply with this issue, our customers are responding positively and many are managing to prevent arrears arising or are working with us to minimise the extent of any arrears that are arising. That is, again, very positive.
Permanent TSB faces many challenges. The months ahead will see us having to take difficult decisions. However, the choice facing the people of this country is whether we want to persist with an emasculated banking system which is forever reliant on taxpayer support, lives the lie of artificial pricing and which is incapable of normal business, or whether we want to take the difficult decisions necessary to restore strength and vigour to our banks in order that they can be weaned off taxpayer support and, ultimately, return to their normal business of banking. The latter includes the raising of money from deposits at reasonable rates, supplemented by reasonable levels of wholesale funding, which funds that are then lent to borrowers at reasonable rates.
I began my career in banking as an 18-year-old junior employee in a branch of Barclays in Rugby in Warwickshire. In the years since, I have worked in retail banking at many different levels and in different countries, and I have learnt a lot about different organisations and what they can and cannot do. Everything I have learned since I came to Ireland tells me that, despite our really serious problems, there is something very special at the heart of this bank. In particular, I have been hugely impressed by the dedication and quality of employees across the bank, and their desire to do the right thing by the taxpayer, shareholder and customer. These are good people who want the bank to be seen as an institution known for good products, good service, good prices and good values. Of course, you, Chairman, will be the judge of whether we can regain that trust. All I ask is that we are given a chance to do that.
I firmly believe that if we can get beyond the current crisis, there is the potential to create a new Permanent TSB bank which will be customer focused, efficient, and a force for positive competition in this marketplace. I believe that will be a good thing for this country. That is the singular goal on which everyone working in the bank is concentrated. I look forward to playing my role in helping to bring that about.