I am joined this morning by my colleagues Shane O’Sullivan, director of group operations; Breege Timoney, product assurance director; and Declan Dolan, group treasurer. Unfortunately, Eamonn Crowley, the chief financial officer, is unable to attend due to personal circumstances.
At our various engagements with the committee over the course of 2018, there have been a number of recurring topics, so perhaps I may begin by providing a quick update on where we are in respect of these matters. I will start with the ongoing tracker mortgage examination. There has been no material change in respect of this issue at Permanent TSB over the past 15 months. In December 2017, we confirmed to the Central Bank of Ireland that we had identified a total of 1,979 accounts which were eligible for redress and compensation. That figure rose by four accounts to 1,983 in the following months as we completed the programme of work.
To date, we have completed redress and compensation for a total of 1,951 accounts, or 99% of the total. A total of 14 customers have chosen not to accept payments at this point. The remaining 19 accounts relate to individuals who we believe have left the jurisdiction. Despite the use of international search agents, we have been unable to locate or contact these customers. In these cases we have lodged the relevant amounts to the mortgage accounts pending contact. Should there be contact in due course, the funds will be transferred to the customers.
The work in this area has been very thorough and objective. We built a strong governance framework around this project that, in turn, shaped both the response of the Central Bank and the industry. The work established a rigorous approach to how we analysed the customer population, identified affected customer accounts, redressed and compensated the holders of those accounts and offered the right of appeal to these individuals through the relevant channels, including appeals panels and the Office of the Ombudsman. All key decisions along the way were subject to check, challenge, review and independent oversight. We are not aware of any cohort of customer accounts, outside those identified by us, which the Central Bank of Ireland believes should be included in our impacted population.
We have been asked frequently at this committee whether we have identified any individuals who bear responsibility for this issue. Let us remind ourselves that the key issue which has been identified was that the bank failed to disclose fully to customers that their request to break early from fixed-rate products would result in the loss of a right to return to the tracker-rate mortgages which they enjoyed so long as they completed the fixed-rate term. During the bank’s work and in responding to the Central Bank's tracker mortgage examination, we found no evidence that the failure to provide this disclosure was planned or deliberate. Of course, the bank’s work on the tracker mortgage examination is, as with all of the main players across the industry, subject to an enforcement investigation by the Central Bank. We continue to co-operate fully with this exercise and this will restrict our ability to answer questions on this issue today.
A second issue which has taken up a significant amount of time here is the subject of non-performing loans, NPLs. As the committee is aware, Permanent TSB has undertaken a series of actions to reduce the percentage of NPLs on its balance sheet with the aim of both reducing the underlying exposure to an economic shock and enabling management to focus on providing ongoing competition in the Irish retail and SME banking market. Last year we discussed two significant transactions in great detail with the committee, namely, Project Glas and Project Glenbeigh. In respect of Project Glas, the migration of the loan accounts to their new owners has now completed. In the context of Project Glenbeigh, we are well advanced in completing the migration of the accounts to their new servicer, Pepper Finance Corporation (Ireland). In completing this project the bank sought accounting advice from KPMG and transaction advice from Citibank. In addition, we had significant ongoing interaction with PwC, as the bank’s auditors, and with the Central Bank of Ireland and the European Central Bank, as regulators, as the transaction was complex and involved the reconciliation of a myriad of interconnected factors to achieve NPL derecognition. Based on stakeholder interactions, we came to the conclusion that ceasing the servicing of the loans within a reasonable timeframe after their sale to Glenbeigh Securities would be necessary to give us the certainty we required that both the loans would be derecognised and the NPL ratio reduced which was, of course, the purpose of the exercise. In doing so, we provided clarity to our customers about their ongoing mortgage servicing arrangements.
The execution of NPL sales or securitisations - which involve thousands of properties - is very complicated as a result of: contractual commitments in respect of cut-off dates, including agreeing a final decision date on which accounts are included or excluded from a transaction; contractual commitments in respect of the management of relevant accounts after contracts are signed but prior to migration; and technical challenges around how and when accounts are onboarded to the new owner’s IT platform. At all times, we undertake these activities in good faith, doing our very best to deliver fair and certain customer outcomes as we fully appreciate the sensitive nature of NPL sales. As a result of the two transactions, the proportion of NPLs on the bank’s balance sheet has been reduced from 26% to 10%. This is good news for the taxpayer as minimising NPL ratios reduces, in the words of the Governor of the Central Bank, national risk. However, the bank’s residual NPL ratio of 10% remains about three times the European average and we will continue to work to reduce the proportion of NPLs on our balance sheet over the coming months.
In this regard, I am conscious of the proposed No Consent, No Sale Bill 2019. Thus far we have avoided public comment on this legislation however, given the forum we are in today, I will say that I share the concern recently expressed to this Committee by the Governor of the Central Bank of Ireland about the legislation. Our concern is that this legislation will make it more difficult for banks to repair and strengthen their balance sheets, to deepen funding sources such as securitisation, to attract sufficient capital, to increase competition, or to reduce interest rates in the market.
The issue of mortgage interest rates has come up at various committee meetings. Over the past year, we have completed a comprehensive overhaul of our fixed rates for new business customers. This has allowed us to reduce fixed rates for three-year and five-year terms and to introduce a very competitive seven-year fixed rate. This the longest fixed-term product we have been able to introduce in eight years, which is testament to the fundamental restructuring and repairing of the balance sheet since 2012. The bank’s next priority is to review the pricing and product strategy for existing customers and we hope to be able to make announcements on this front during the course of this year and beyond.
Another issue which has attracted some attention in recent months relates to the changes we have made to the pricing model for legacy current accounts. I will make a couple of points in this regard. The bank’s objective is to maximise the sustainable value it generates for its shareholders, including the Irish taxpayer, while delivering value to its customer base. That requires us to review constantly the pricing models in different product areas to ensure we are not leaking taxpayer value. In current accounts, we have a very competitive, award-winning product which we launched three years ago. This product rewards customers in various ways and makes payments based on card usage. It is now the default current account offering for the bank’s customers. However, we do have legacy products which are not economically viable and which are out of kilter with the wider market. The changes we made to the aforementioned current accounts address this issue.
In this context, the evolving and ongoing changes to the bank’s customer offering is reflective of the fact that the banking world is changing. In particular, both customers’ and regulators’ needs are changing, and we have to change with them. That is going to require constant and dynamic changes to all dimensions of the bank’s proposition, for example, to both our product and digital offering. In respect of digital, we are already investing in improving service for customers, having made some significant progress over the last 12 months, and there is much more to come now that we are largely free of the anchors of the past.
In its invitation to us to attend this meeting, the committee indicated its interest in our views on Brexit and the emerging banker accountability framework.
In respect of Brexit, Permanent TSB is focused exclusively on the Irish retail and SME banking market. Some years ago, we disposed of loan books in the UK. We have no ongoing business interests in that jurisdiction. Therefore, our concern about Brexit is the general economic impact, in particular on our SME customers who may have exposure to the UK market. We have no evidence to date that would justify any significant concern in this regard. As the committee would expect, we are monitoring the situation carefully and engaging with the SBCI in respect of its future growth loan scheme. We support the banker accountability framework.
The bank recently announced its results for 2018. As the results demonstrate, we made substantial progress in the bank's transformation last year. We reduced our NPL ratio and generated operating and bottom line profit. Our position in lending, particularly new mortgage lending, grew significantly. Most important, we successfully exited the EU restructuring plan into which we were placed after the crisis. With the support of the Irish taxpayer and stakeholders across the system, including this committee, the regulator, the Department of Finance and our customers, we have worked long and hard to rebuild Permanent TSB after the financial crash. The progress we have made has come at some really significant cost to the taxpayer, our staff and, most important, our customers. However, the taxpayer has been saved billions of additional funding and capital costs that would have been incurred if the bank had been allowed to fail. PTSB, which has a customer base of over 1.1 million, has been saved as an important competitive force in a market that is not exactly overburdened with competitors. Now we will be part of the debate about how the market is shaped in the future. We have an even better opportunity to return more of the investment which the taxpayer made in us. This always remains the key objective for me and the board. I thank the committee for its attention.