Forward Looking Statements

Transcription

1 Forward Looking Statements

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 saving, 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 Annual Reports, are available on-line at

3 Permanent tsb Group Holdings plc CONTENTS Overview Financial Highlights 2 Permanent tsb Fact Profile 3 Group Chairman s Statement 4 Group Chief Executive s Review 6 Business Review Operating and Financial Review 9 Risk Management 31 Corporate Governance Board of Directors 39 Directors Report 43 Corporate Governance 48 Directors Report on Remuneration 58 Consolidated Financial Statements Statement of Directors Responsibilities 62 Independent Auditor s Report 63 Consolidated Financial Statements 66 Notes to the Consolidated Financial Statements 73 Page 1

4 Financial Highlights Summary Consolidated Income Statement Year ended Year ended 31 December December 2013 m m Total operating income Total operating expenses (before exceptional items and impairment charges) (389) (300) Operating loss before impairment writeback/ (charge) and exceptional items (81) (48) Impairment writeback/ (charge) on loans and advances to customers 41 (927) Impairment writeback/ (charge) on repossessed assets 1 (2) Operating loss before exceptional items (39) (977) Exceptional items (net) (9) 309 Loss before taxation (48) (668) Taxation (54) 407 Loss for the year (102) (261) Group Performance Metrics Net Interest Margin % (Pre government guarantee fees) 0.90% 0.82% Return on Equity (1) -4.6% -10.5% Cost to Income Ratio (2) 126.3% 119.0% Cost of Risk Ratio (3) -0.1% 3.0% Impairment writeback/ (charge) by portfolio ROI Residential Mortgages 32 (727) UK Residential Mortgages (10) (21) Commercial Mortgages 13 (160) Consumer Finance 6 (19) Impairment writeback/ (charge) on loans and advances to customers 41 (927) Key Balance Sheet and Funding Metrics 31 December December 2013 m m Total Shareholders' Funds 2,280 2,384 Total Assets 36,293 37,601 Total Net Loans and Advances to Customers (including Assets Held For Sale) 28,236 29,461 Impairment Provisions (3,722) (4,035) Impairment Provisions % of Gross Loans 11.7% 12.1% Provision Coverage Ratio (4) 48% 47% Weighted average LTV of stock of residential mortgages ROI Home Loan 92% 108% ROI Buy-To-Let 118% 132% UK Home Loan 73% 82% UK Buy-To-Let 74% 82% Total Customer Deposits 20,438 19,511 Funding from Monetary Authorities 4,870 6,940 Wholesale Funding 7,662 7,894 Loan to Deposit Ratio ("LDR") 138% 151% Regulatory capital Available Regulatory Capital 2,212 2,489 Risk Weighted Assets 14,830 16,775 Common Equity Tier 1 Ratio (transitional basis) 14.2% 13.1% Total Capital Ratio (transitional basis) 14.9% 14.8% (1) Defined as loss for the period after tax as a percentage of total average equity. (2) Defined as operating expenses excluding exceptional items divided by total operating income. (3) Defined as impairment charges divided by the average balance of net loans and advances to customers (including assets held for sale). (4) Defined as impairment provision as a % of loans greater than 90 days in arrears and/or impaired. Page 2

5 Permanent tsb Fact Profile Who We Are: Permanent tsb is a leading retail bank in the Republic of Ireland Customers Served: c.1.1 million Employees: c.2,300 Presence: 77 Branches across Ireland with the Head Office in Dublin Stock Listing: Our Purpose: Our purpose is to maximise economic value for our shareholders. We achieve this by serving customers better than competitors; being respected for offering excellent careers for our people; and contributing positively to society. Our Strategic Goal: We aim to be the best retail bank in Ireland. Irish Enterprise Securities Market Exchange Shareholders: 134,500 shareholders in approximately 39 jurisdictions Share Price at 31 December 2014: 6 cents Total Assets: 36 billion Total Equity: 2 billion Total Net Interest Income: 0.3 billion Page 3

6 Group Chairman s Statement 2014 was another important year for the Group during which we made good progress in delivering our objectives including providing competition in our core markets, progressing the restructuring of the Group and, of course, improving our financial performance. We delivered on all our stakeholder commitments and, by doing so, advanced our journey back both to relevance in the Irish retail financial services market and to sustainable profitability marked an important year in banking industry regulation as the European Central Bank (ECB) took on regulatory responsibilities for key financial institutions across the Eurozone under the Single Supervisory Mechanism (SSM). As part of this process the ECB undertook a Comprehensive Assessment of banks deemed significant institutions ; this included an Asset Quality Review (AQR) and baseline and adverse scenario Stress Tests. The outcome of the adverse Stress Test was a capital shortfall of 855 million. The result of the adverse Stress Test opens the opportunity for us to raise capital from external investors; this would mark a significant milestone in our return to private ownership. Last year was also a very good year for the Irish economy as it continued its recovery from the financial crisis. Macroeconomic indicators such as Gross Domestic Product (GDP), House Price Inflation (HPI) and Employment continued to trend positively. In addition, the fiscal position of the Irish State progressed well with continued strengthening of the Government Deficit to GDP ratio and the Government successfully engaging with the international debt markets. The Group reported a loss after tax of 102 million, a 61% improvement on the results for the financial year Before exceptional items, losses have decreased by 96%. We are proud of the progress we are making and we are on-track to return to sustainable profitability in line with the commitment made to shareholders. However, we are very conscious of the continuing challenges we face and are fully cognisant that in 2014 we remained a loss-making business that owes its continued survival to the support of the Irish people. Commercially, the brand continues to be well received by Irish consumers. The Core Bank s permanent tsb SBU continued to attract more new customers. In 2014 it opened over 56,000 new Current Accounts, increased its Retail Deposit base by circa 700m, and achieved over 425 million of new Lending. The Core Bank s Asset Management Unit (AMU) engaged effectively with customers in arrears by offering long term sustainable treatments. The Group has exceeded all targets set by the Central Bank of Ireland (CBI). This is reflected in the Core Bank s reduced impairment charge which improved by close to 700 million versus In respect of the Non-Core business, I am pleased to report that the Group has reached agreement to sell two major Non- Core loan portfolios with an aggregate portfolio size of approx. 5 billion including 3.5 billion or 50% of the Group s UK Page 4 mortgage loan book (primarily Buy-To-Let Bank of England Tracker mortgages) and 1.5 billion of a legacy nonperforming Irish Commercial Real Estate (CRE) portfolio. This is a significant achievement which will, on completion, mean that the Group has achieved over 50% of the total deleveraging target well ahead of schedule. During the year, the Group also successfully managed to sell the Springboard Mortgages loan book (a legacy portfolio of specialist residential mortgages) and a smaller proportion of (our UK business) mortgages. We will continue to monitor the market for further deleveraging opportunities if prices are affordable. SSM Comprehensive Assessment By the time of the announcement of the SSM Comprehensive Assessment results, the Group had already taken a number of measures to address the additional capital requirement ( 855m) which included asset sales and improved financial performance. In total, these items accounted for over 330 million of the shortfall. Together with the potential availability of the Contingent Capital instrument (CoCo), which has a value of approximately 400 million, the Group was able to confirm that it had already accounted for over 80% of the shortfall identified. The additional capital required under the SSM Comprehensive Assessment must be raised within a 9-month period from the date of the announcement, being 26 July Accordingly, in compliance with the requirements of the ECB, the Group submitted a Capital Plan addressing how it proposed to address the identified capital shortfall. This plan was duly noted and publically endorsed by the SSM Supervisory Board thereby facilitating the implementation of the main capital generating measure proposed (an external capital raise comprising the issue of Ordinary Shares to new investors for up to 400 million and a 125 million Additional Tier 1 instrument; the use of the proceeds will include the repurchase of all of the 400 million CoCo outstanding) which, when implemented, will mean that the capital shortfall will have been fully remedied within the required timeframe. The Group, along with its advisors, is currently in advanced stages of finalising preparations for the implementation of the capital raise. EU Restructuring Plan Following the outcome of the SSM Comprehensive Assessment and the finalisation of the Group s Capital Plan, the Group submitted an updated European Union (EU) Restructuring Plan to the European Commission. The Group has received agreement in principle for its Restructuring Plan and expects full approval prior to the Group s capital raise.

7 Group Chairman s Statement The terms of the final form of the EU Restructuring Plan are expected to be consistent with, and supportive of, the Group s existing plans. The approval of the Group s EU Restructuring Plan will be a hugely significant and important milestone for the Group and for all of its stakeholders including shareholders, customers and employees. Board Changes Pat Ryan retired as a Director at the Company s Annual General Meeting (AGM) held in May I would like to thank him for his enormous contribution to the Board over the previous five years. During late 2013 and early 2014, Ken Slattery, Julie O Neill, Richard Pike and David Stewart were appointed to the Board as Non-Executive Directors and bring numerous years of experience. A short biography and background of all Directors is set out on pages 39 to 41. Summary I want, once again, to acknowledge the very significant contribution that the Irish taxpayer has made to the Group and to restate that the Board recognises the need to preserve and return capital to the State. I would also like to extend my appreciation to the Department of Finance ( DoF ) and the CBI for their continued support. I want to thank our customers for their continued support and for believing in us. Finally, I would like to extend my appreciation and thanks to all the staff of the Group. Their hard work and commitment inspire us all. Alan Cook Group Chairman 10 March 2015 Page 5

8 Group Chief Executive s Review As the Chairman noted, 2014 was a year of key events and solid achievements in the Group s journey to sustainable profitability. We ended the year having delivered on our commercial and financial commitments, with a defined Capital Plan to meet the SSM Comprehensive Assessment requirement and an EU Restructuring Plan agreed in principle. We make no secret of our ambition to build a retail banking organisation focused on the Irish market that maximises value for its shareholders by serving its customers better than competitors, offering excellent opportunities for its staff and contributing positively to the community. We believe that long term, sustainable shareholder value is best delivered through a business that provides a superior customer experience and we try to ensure that this philosophy informs everything we do. Having said that, while we believe we have made progress since we started in 2012, we also recognise that we have more to do. We want to be seen by customers as a trusted custodian for deposits and the preferred choice for borrowing. To deliver this aspiration to the highest quality, we must focus not only on what we do but on how we do it, and we are committed to embedding a values-driven culture across all parts of the Group. With the improving economic backdrop, the demand for retail banking services will continue to increase. This confirms the opportunity which exists for the Group. Strategic Objectives Through 2014 we continued to implement our key strategic objectives. We gained profitable market share in key product offerings. In terms of our bottom line results, we saw a significant reduction in loss after tax and underlying performance compared to As a result I can say, with more confidence than ever before, that the Group will be successful in creating a valuable asset for our shareholders. Core Bank In 2014, we approved 485 million in Mortgage Lending representing an increase of circa 67% from Drawdowns over 2014 amounted to 429m, representing a market share of 11%. We advanced our plans to refresh and expand our offering for existing and new customers in the OME (Owner Managed Enterprises) sector. The early signs are encouraging. Personal Term Lending and Credit Cards have also shown growth by circa 18% from In summary, we are back competing hard in the Irish retail banking marketplace. We remain confident that we can continue to represent a strong force in retail banking in Ireland. Tackling The Arrears Problem Providing help and support to our customers in mortgage arrears continues to be both a business and a moral imperative. We have now offered close to 27,000 sustainable long term treatments to customers who were in arrears or at risk of going into arrears. Over 90% of customers who have been offered and accepted such solutions continue to perform in line with their new contractual arrangements. Irish Home Loan and Buy-to-Let total mortgage arrears levels fell by five percentage points and three percentage points respectively in 2014 and are at 10.7% and 13.6% of total cases at end December. It is worth noting arrears have fallen 32% from their peak in August These numbers will continue to fall over time. Importantly we have met, and exceeded, all our own targets for arrears resolution and those targets of the Central Bank of Ireland s Mortgage Arrears Resolution Strategies ( MARS ) process. As a result of the improving quality of the loan book aided by improvements in the macro-economic factors and higher loan cures, the flow of impairment charge is reducing and consequently the 2014 charge is down by over 100% compared to 2013 resulting in an impairment write-back of 41 million in the year ended 31 December Strong New Business Acquisition Irish Retail Deposit volumes increased by circa 700 million which represents a market share of 13%. The strong growth in Current Accounts in 2013 has continued through into We opened over 56,000 new Current Accounts in 2014, with a continued focus on the Payroll Current Account. We continue to review our Current Account offering to make sure that we lead the market in addressing customer demands. Page 6

9 Group Chief Executive s Review Non-Core I am pleased to announce that we have agreed the sale of 3.5 billion (GBP 2.5 billion) of loans held by our UK business, CHL. When completed this transaction will mean that the Group will have successfully de-leveraged 50% of the CHL loan book. The Group will continue to monitor the market for further deleveraging opportunities if prices are within its Capital Plan. The sale will complete later in the year and we expect the resulting capital usage is within the Group s planning parameters. Further details on these transactions will be announced in due course. We have also been able to agree the sale of CHL s loan origination and servicing platform. This provides certainty for the CHL Team and will enable them to grow and strengthen the business under new ownership. The CHL Team, which consists of approximately 90 UK-based employees, will continue to service the Group s residual UK assets after the CHL deleveraging transaction is complete. This will provide increased operational certainty over the management of the residual CHL assets pending their sale. I am also pleased to announce that we have agreed the sale of non-core CRE loans of 1.5 billion. The sale will complete later in the year and the transaction is capital accretive to the Group. During last year, we also successfully executed two transactions, namely, the sale of the Springboard Mortgages loan book which we sold for a small loss and a smaller proportion of CHL mortgages. The price achieved on the CHL trade was significantly better than would have been achieved 18 months prior when the Group previously marketed the assets and vindicated our decision to hold off until a stronger price emerged. Financial Performance Headlines Group Financial Performance On an underlying basis, the Group reported a Loss Before Exceptional Items of 39 million in 2014 (2013: 977 million), representing an improvement of 96%. The Group s Net Interest Margin (NIM) before the cost of the Eligible Liabilities Guarantee (ELG) improved by 8bps despite continuous ECB rate reductions. We continue to acknowledge that the NIM needs to improve. The key driver over the medium term will be the Cost of Funds. In 2014 while Total Asset Yield reduced by 13bps, this was more than offset by the reduction in the Cost of Funds driving the NIM expansion of 8bps. ELG Fees showed a reduction of 46 million in 2014 in line with the reduction of covered liabilities following the expiry of the scheme in early Operating Expenses Before Exceptional Items increased by 30% primarily driven by an increase in provision for legacy legal and compliance related liabilities, and increased regulatory costs under the SSM. Impairment charges on loans and advances to customers decreased by 968 million or 104% compared to 2013, which is driven by reducing levels of arrears, falling new default flows and improved collateral valuations in the CRE book. As a result of improving macro-economic factors, we have reduced the peak to trough HPI assumption by five percentage points in 2014 while also maintaining a buffer of circa 10 percentage points relative to the actual Central Statistics Office (CSO) index which has fallen to 38% by the end of January Business Unit Financial Performance Core Bank: The Core Bank reported a Profit Before Exceptional Items of 5 million with a NIM of 121bps compared to a Loss Before Exceptional Items of 694 million in 2013 (NIM of 97bps) driven by improved NIM and a significant improvement in impairment charges. Non-Core: The Non-Core business reported a reduced loss Before Exceptional Items of 44 million compared to 283 million in 2013 mainly driven by a decrease in the impairment charge within the Irish CRE portfolio. Group Funding The Group s funding position improved significantly during Customer Accounts now represent 61% (31 December 2013: 56%) of the Group s total funding with ECB borrowings falling further from 6.9 billion in December 2013 to 4.9 billion at 31 December 2014; this now represents 15% (31 December 2013: 20%) of the Group s total non-equity funding. The improved funding position was achieved through deposit growth, reductions in debt securities held and an on-going reduction in historic loan book levels arising from deleveraging of Springboard Mortgages, the sale of a tranche of CHL mortgages and net loan book repayments and redemptions. The Group expects that its funding position will be further assisted by the planned deleveraging of both the Irish CRE and CHL books, and any further NAMA redemptions. The Loan-to-Deposits Ratio for the Group stood at 138% (31 December 2013: 151%); Core Bank was 101% (31 December 2013: 108%). Page 7

10 Group Chief Executive s Review Group Capital The Group transitioned from Basel II to Basel III under the CRD IV directive from 1 January Accordingly, the Group now reports Common Equity Tier 1 ratio (transitional basis) of 14.2% at 31 December 2014 (31 December 2013: 13.1%). Capital attrition is slowing as loss levels reduce. Legacy Issues During 2014, we were notified by the CBI that they were commencing an investigation in respect of a legacy mortgage issue under their Administrative Sanctions Procedure. The investigation relates to how the Group dealt with a section of customers who, were on a fixed rate mortgage with a contractual right to move to a tracker at the end of that fixed rate term, and were not informed that they would not be provided with the opportunity to move to a tracker mortgage (as they had understood they could) as a result of their decision to exit the fixed rate term early. As this investigation is ongoing I am restricted in what I can say about it at this time. warning system in managing any difficulties our customers may be facing. As regards to the Non-Core business, we have made significant progress by achieving agreement to sell over 50% of the noncore assets. A priority now is to complete these transactions; we will monitor the market to deleverage the remainder of the portfolios at the best possible price for the Group. In summary, the Group is on a path to sustainable profitability and thus becoming a profitable and competitive retail bank serving its customers for the overall benefit of the economy. Jeremy Masding Group Chief Executive 10 March 2015 However, I confirm the Group has committed both to identify all relevant customers and to provide full redress for their losses as a matter of urgency. Our People The success for any organisation relies heavily upon its people. I can affirm that it is very much the case for permanent tsb. I am very proud of all my colleagues who continue to ensure permanent tsb is recognised as a leading Irish retail bank. Strategic and Financial Outlook The foundations for profitable growth and the delivery of sustainable shareholder value have been built. There are exciting times ahead for the Group as we build an asset of real value for our shareholders. We are committed to improving the NIM, maintaining a trajectory towards a viable cost/income ratio, successfully completing the targeted deleveraging of the Non-Core businesses and successfully implementing all elements of the agreed Capital Plan. Our priorities for 2015 are to build natural market share in our chosen product areas, improve our product range and improve the customer experience, all of which mean we will remain a genuine competitive force in the Irish retail banking market. While we have made significant progress in tackling the arrears problems, there remains further work to be done. We want to build on the platform we have set up for arrears management. While ensuring the existing customers who are on long term treatments continue to perform, we want to ensure the collection process is proactive and acts as an early Page 8

11 Operating and Financial Review Summary Consolidated Income Statement Year ended 31 December 31 December Change m m % Net interest income (before ELG fees) % ELG fees (59) (105) -43.8% Net other income % Total operating income % Total operating expenses (excl. exceptional items) (389) (300) 29.7% Operating loss before impairment charges and exceptional items (81) (48) 68.8% Impairment writeback/(charge) on loans and advances to customers 41 (927) % Impairment writeback/(charge) on repossessed assets 1 (2) % Operating loss before exceptional items (39) (977) -96.0% Exceptional items (net) (9) % - Loss on disposal of held for sale loans and advances to customers (9) % - Restructuring costs - (20) % - Impact of the wind-up of the defined benefit pension schemes % Loss before taxation (48) (668) -92.8% Taxation (54) % Loss for the year (102) (261) -60.9% Financial Performance Headlines Net interest income (pre-elg) increased by 6.5% from 2013 to 329m in This growth was driven by an 8 basis points increase in net interest margin, more than offsetting a 5% decrease in average interest earning assets. Net other income of 38m is a 20.8% decrease compared to This was due to higher one-off gains on debt securities transaction in Total operating expenses (excluding exceptional items) at 389m for 2014 represents a 89m increase compared to 2013 which is mainly due to an increase in one-off provision for legacy legal and compliance related liabilities, significant costs arising from the SSM Comprehensive Assessment and Restructuring Plan projects and payment of the bank levy. Impairment write-back on loans and advances to customers of 41m is a decrease of 968m from This mainly reflects the progress made by the Group in dealing with customers in arrears together with the improved macro-economic conditions in Ireland. Exceptional items include 9m in relation to net loss on disposals of held for sale loans and advances to customers. In the prior year, the exceptional items relate to the impact of the wind-up of the defined benefit pension schemes and restructuring costs. Taxation charge for the year ended 31 December 2014 is 54m. Taxation for the year ended 31 December 2013 included an exceptional credit for recognition of deferred tax assets on carried forward tax losses of 414m. Page 9

12 Operating and Financial Review Interest Income The following table sets out the components of the Group's interest income in the years ended 31 December 2014 and 2013, and the change and the percentage change in each of the components between these two years. Year Ended 31 December December 2013 Change m m % Loans and advances to customers % Loans and advances to banks % Debt securities and other fixed-income securities - Held to maturity % - Available for sale ("AFS") % - Loans and receivables Amortisation of AFS securities reclassified to loans and receivables 3 (11) % Lease and instalment finance % Gains on interest rate hedges on assets Total interest income % Interest income from loans and advances to customers was 682m in the year ended 31 December 2014, a decrease of 104m, or 13.2% compared to 786m in the year ended 31 December 2013, principally due to a reduction in interest income on tracker mortgages as a result of ECB Base Rate reductions of 10 basis points in June and September Interest income from loans and advances to customers in the year ended 31 December 2014 included interest income recognised on non-performing loans of 94m, which increased by 9m from 85m for the year ended 31 December 2013, and the unwind of the discount on impaired loans of 53m. Interest income from debt securities and other fixed-income securities was 185m in the year ended 31 December 2014, an increase of 4m, or 2.2%, compared to 181m in the year ended 31 December 2013, principally due to improved mix of securities held. Interest Expense (excluding ELG fees) The following table sets out the components of the Group's interest expense (excluding ELG fees) in the years ended 31 December 2014 and 2013, and the percentage change in each of the components between these two years. Year Ended 31 December December 2013 Change m m % Deposits from banks (including central banks) (81) (127) -36.2% Due to customers (312) (383) -18.5% Interest on debt securities in issue (53) (61) -13.1% Interest on subordinated liabilities (68) (63) 7.9% Gains on interest rate hedges on liabilities % Amortisation of core deposit intangibles (31) (31) - Total interest expense (excluding ELG fees) (545) (664) -17.9% Interest expense on deposits from banks (including central banks) was 81m in the year ended 31 December 2014; a decrease of 46m, or 36.2% compared to 127m in the year ended 31 December 2013, principally due to reduced levels of ECB funding. Interest payable to customers was 312m in the year ended 31 December 2014, a decrease of 71m, or 18.5% compared to 383m in the year ended 31 December 2013, due to rate reductions on retail and corporate deposits, offset by a 1,870m increase in the average balance of total customer accounts. Interest expenses on debt securities in issue was 53m in the year ended 31 December 2014, a decrease of 8m or 13.1% compared to 61m in the year ended 31 December 2013 as a result of reduction in bonds and medium term notes owing to maturities and repurchases during Page 10

13 Operating and Financial Review Net Interest Income Net interest income (excluding ELG fees) for the year ended 31 December 2014 increased by 20m, or 6.5%, to 329m from 309m for the year ended 31 December This increase was driven by a reduction in cost of customer deposits and deposits from banks. Fees payable by the Group under the ELG Scheme were 59m in the year ended 31 December 2014, a decrease of 46m, or 43.8% compared to 105m in the year ended 31 December 2013, due to a decrease in total liabilities covered under the scheme from 7.4bn at 31 December 2013 to 2.8bn at 31 December This fee will continue to reduce further as guaranteed liabilities mature. Total average interest-earning assets decreased by 1,775m for the year ended 31 December 2014 compared to the year ended 31 December ROI and UK residential mortgage balances decreased by 880m compared to the prior year due to redemptions and repayments being higher than new lending. Commercial mortgages balances decreased by approximately 102m in the year due to the run off of the book which is closed to new business. Average non-lending interest-earning assets (principally debt securities) decreased by approximately 611m in the year due primarily to 849m NAMA bond redemptions, 248m disposal of a legacy portfolio of mortgage backed securities and 277m maturities of government bonds. This was partially offset by 821m further additions of debt security assets. Average Interest Earning Assets and Liabilities, Yield/Rate and Net Interest Margin The following table sets out the Group's net average interest-earning assets, net average interest-bearing liabilities and net interest income and illustrates the comparative net interest margin for the years ended 31 December 2014 and Year ended Amount of 31 December 31 December Percentage change change m m m % Total average interest-earning assets 36,319 38,094 (1,775) -4.7% Total average interest-bearing liabilities 34,719 35,853 (1,134) -3.2% Net interest income % Net interest income (excluding ELG fees) % Average yield on average interest earning assets 2.41% 2.55% -14 bps Average rate on average interest-bearing liabilities (excluding ELG fees) 1.57% 1.85% -28 bps Net interest margin (excluding ELG fees) 0.90% 0.82% 8 bps NIM movement since December % NIM December 2013 to December % 0.50% 0.82% 0.13% 0.07% 0.12% 0.02% 0.90% 0.00% NIM December 2013 Asset Pricing Deposit Funding Costs ECB Funding Costs Wholesale Funding NIM December 2014 The Group's net interest margin (excluding ELG fees) increased from 0.82% for the year ended 31 December 2013 to 0.90% for the year ended 31 December Page 11

14 Operating and Financial Review The key drivers of the movement in 2014 were as follows: Asset pricing: Changes in asset pricing contributed to a 13 basis point decrease in net interest margin, due primarily to the adverse impact on interest income from ECB tracker mortgages of two ECB Base Rate reductions of 10 basis points each, which took effect in June and September Deposit Funding Costs: The on-going reduction in the cost of corporate and retail deposits, which reflected normalisation in deposit rates across the Irish market, contributed 7 basis points to net interest margin improvement. Decreased deposit funding costs contributed 11 basis points to net interest margin but this was offset by a mix change variance of 4 basis points due to the replacement of ECB funding with relatively more expensive deposits. ECB Funding Costs: The successive cuts in the ECB Base Rate from 75 basis points at the start of 2013 to 5 basis points from September 2014 contributed 12 basis points to net interest margin through lower funding costs although this benefit was more than offset by reduced interest income on ECB tracker mortgages discussed above. Wholesale funding costs: Reduced wholesale funding costs contributed 2 basis points to net interest margin improvement due to the repurchase of certain expensive medium term notes and favourable rates achieved on new issuance of mortgage backed securities. Key NIM Drivers: Average Balance Sheet and Interest Rate Data The following table sets out the average balances of interest-earning assets and interest bearing liabilities for the years ended 31 December 2014 and The table also outlines the amounts of interest income earned and interest expense (excluding ELG fees) incurred by the Group in the years ended 31 December 2014 and 2013, as well as the average interest rates at which interest income was earned on such assets and interest expense was incurred on such liabilities. For the purpose of the table below, month-end average balances for 13 months from 31 December 2013 to 31 December 2014 are used to calculate the various average interest earning assets and interest bearing liabilities. Interest expense excluding ELG fees, as a result of which such amount and rates are lower than they would otherwise be. Year ended 31 December 2014 Year ended 31 December 2013 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Interest-earning assets Loans and advances to banks 1, % 1, % Loans and advances to customers 28, % 30, % Debt securities and derivative assets 5, % 6, % Total average interest-earning assets 36, % 38, % Interest-bearing liabilities Customer accounts 20, % 18, % Deposits by banks 9, % 12, % Debt securities in issue and derivative liabilities 4, % 4, % Subordinated liabilities % % Total average interest-bearing liabilities 34, % 35, % Total average equity attributable to owners 2,237 2,493 The Group's net average balance of loans and advances to customers (which includes assets classified as held for sale at 31 December 2014 of 1,030m) decreased to 28,882m for the year ended 31 December 2014 from 30,469m for the year ended 31 December 2013 (a 5% decrease) as a result of net repayments, the sale of CHL loans with a net value of 222m on 24 September 2014 and the sale of Springboard loans with a net value of 302m on 22 October The average interest rate on loans and advances to customers decreased to 2.36% for the year ended 31 December 2014 from 2.58% for the year ended 31 December This was driven by the adverse impact on interest income of ECB tracker mortgages as a result of ECB Base Rate reductions from 75 basis points at the start of 2013 to 5 basis points from 10 September The Group's average balance of debt securities and derivative assets decreased to 5,663m for the year ended 31 December 2014 from 6,274m for the year ended 31 December 2013 (a 9.7% decrease) primarily as a result of earlier than anticipated NAMA bond redemptions, disposal of a legacy portfolio of mortgage backed securities and maturities of government bonds. This was partially offset by further additions of debt security assets. The average interest rate on debt securities and derivative assets increased to 3.28% for Page 12

15 Operating and Financial Review the year ended 31 December 2014 from 2.92% for the year ended 31 December 2013, principally as a result of accelerated EIR adjustments on earlier than anticipated redemption of NAMA bonds. The Group's average balance of customer accounts increased to 20,417m for the year ended 31 December 2014 from 18,547m for the year ended 31 December 2013 (a 10% increase), driven primarily by growth in current account balances and retail deposits. The average interest rate on customer accounts decreased to 1.68% for the year ended 31 December 2014 from 2.23% for the year ended 31 December 2013, reflecting rate reductions implemented on both retail and corporate deposits. The Group's average balance of deposits by banks decreased to 9,695m for the year ended 31 December 2014 from 12,331m for the year ended 31 December 2013 (a 21.4% decrease) primarily as a result of reduction in ECB funding. The average interest rate on deposits by banks decreased to 0.84% for the year ended 31 December 2014 from 1.03% for the year ended 31 December 2013, primarily as a result of the ECB Base Rate reductions over 2013 and The Group's average balance of debt securities in issue and derivative liabilities decreased to 4,233m for the year ended 31 December 2014 from 4,626m for the year ended 31 December 2013 (a 8.5% decrease) due to the repurchase by the Group of certain medium term notes partially offset by new issuance of mortgage backed securities. The average interest rate on debt securities in issue and derivative liabilities decreased to 1.25% for the year ended 31 December 2014 from 1.30% for the year ended 31 December 2013, driven by new issuance of mortgage backed securities at a weighted average rate of 2.5% at 31 December The Group's average balance of subordinated liabilities increased to 374m for the year ended 31 December 2014 from 349m for the year ended 31 December 2013 due to amortisation of the discount on the Contingent Capital Note which makes up the majority of this balance. The average interest rate on subordinated liabilities for the year ended 31 December 2014 remained broadly in line with that of the year ended 31 December Changes in Interest Income and Interest Expense Volume and Rate Analysis The following table sets out a comparative analysis of changes in interest income and interest expense of the Group for the year ended 31 December 2014 compared to the year ended 31 December Changes in interest income or interest expense are attributed to either (i) changes in average balances (volume/mix change) of interest-earning assets or interest bearing liabilities or (ii) changes in average rates (rate change) at which interest income was earned on such assets or at which interest expense was incurred on such liabilities. Changes in the Group's interest income and expense have been allocated between changes in average volume and changes in the average rates for the year ended 31 December 2014 compared to the year ended 31 December The Group calculates volume and rate variances based on the movements of average balances over the period and changes in average interest rates on interest-earning assets and interest-bearing liabilities. The net change attributable to changes in both volume and rate has been allocated in line with the amounts derived for pure rate and volume variances (excluding ELG fees). Year ended 31 December 2014 compared to year ended 31 December 2013 Increase/(decrease) in net interest income due to changes in: Volume/Mix Yield/Rate m m Interest income Loans and advances to banks 1 1 Loans and advances to customers (41) (63) Debt Securities and derivative assets (17) 20 Total increase/(decrease) in interest income (57) (42) Interest expense Customer accounts (41) 112 Deposits by banks Debt securities in issue and derivative liabilities 6 1 Subordinated liabilities (5) - Total (increase)/decrease in interest expenses (13) 132 Total (decrease)/increase in net interest income (70) 90 Page 13

16 Operating and Financial Review Net Other Income The following table sets out the components of the Group's net other income in the years ended 31 December 2014 and 2013, and the amount of the change and the percentage change in each of the components between these two years. Year ended 31 December 31 December Change m m % Fees and commission income % Fees and commission expenses (19) (14) 35.7% Net fees and Commission income % Net trading income/(expense) 5 (2) % Gain on buy-back of debt securities issued % Gain on disposal of Government gilts % Other income % Other operating Income % Loss on buyback of debt securities issued (11) % Loss on disposal of other debt securities - (5) % Other expenses (1) (4) -75.0% Other operating expense (12) (9) 33.3% Total net other income % Net fees and commission income of 37m for the year ended 31 December 2014 remained in line with that of the year ended 31 December Net trading income/(expense) moved from a net trading expense of 2m for the year ended 31 December 2013 to a net trading income of 5m for the year ended 31 December 2014 primarily due to mark to market adjustment on certain derivative instruments being reclassified as trading from hedge accounting relationships. Other operating income decreased by 15m, or 65.2%, from 23m for year ended 31 December 2013 to 8m for year ended 31 December 2014 primarily due to a non-recurring gain of 16m on repurchase of certain own debt in included a gain of 4m on the sale of certain loans and advances. Other operating expense increased by 3m, or 33.3%, from 9m for year ended 31 December 2013 to 12m for year ended 31 December 2014 primarily due to an 11m loss on the buyback of debt securities issued. The repurchase was carried out to better align the Group s funding structure in preparation for the introduction of Liquidity Coverage Ratio (LCR) under Basel III. Page 14

17 Operating and Financial Review Total Operating Expenses (excluding exceptional items) Total operating expenses (excluding exceptional items) consist of administrative, staff and other expenses, bank levy, depreciation, amortisation of property and equipment and intangible assets. Total operating expenses (excluding exceptional items) increased by 29.7% from 300m for the year ended 31 December 2013 to 389m for the year ended 31 December The following table sets out the components of the Group's total operating expenses (excluding exceptional items) in the years ended 31 December 2014 and 2013, and the amount of the change and the percentage change in each of the components between these two years. Year ended 31 December 31 December Change m m % Staff Costs: Wages and salaries including commission paid to sales staff % Social insurance Pension Costs: Payments to defined contribution pension schemes % Charge in respect of defined benefit pension schemes % Total staff costs % Other general and administrative expenses % Administrative, staff and other expenses % Bank Levy % Depreciation of property and equipment Amortisation of intangible assets % Writeback of impairments on revaluation of property (4) (1) 300.0% Total Operating Expenses (excluding exceptional items) % Cost to income ratio 126% 119% 7 ppts Administrative, staff and other expenses increased by 63m, or 22.2%, from 284m for the year ended 31 December 2013 to 347m for the year ended 31 December 2014, due to an increase in other general and administrative expenses, primarily due to an increase in provision for legacy legal and compliance related liabilities and significant costs arising from the SSM Comprehensive Assessment and Restructuring Plan projects. Total staff cost increased by 3m, or 2.4%, from 127m for the year ended 31 December 2013 to 130m for the year ended 31 December 2014, due primarily to new staff hires in the AMU and as a result of regulatory requirements. The bank levy introduced through the 2013 Finance Act was payable in the year ended 31 December 2014 and amounted to 27m. Depreciation and amortisation of property and equipment and intangible assets increased by 2m, or 12%, from 17m for the year ended 31 December 2013 to 19m for the year ended 31 December 2014 in line with additions to property and equipment and intangible assets. Write-back of impairment of property and equipment increased from 1m for the year ended 31 December 2013 to 4m for the year ended 31 December 2014 due to increase in valuation of properties. Cost-to-income ratio increased by 7ppts from 119% to 126% mainly due to increase in other general and administrative expenses and the payment of bank levy offset by increase in total operating income. Page 15

18 Operating and Financial Review Impairment charges The following table sets out the components of the Group s impairment write-back/charge in the years ended 31 December 2014 and 2013, and the amount of the change and the percentage change in each of the components between these two years. Year ended 31 December December 2013 Change m m % ROI residential mortgages - Home loans % - Buy-to-let (156) % Total ROI residential mortgages (32) % - Commercial (13) % - Consumer finance (6) % (51) % UK residential mortgages - Home loans % - Buy-to-let % Total UK residential mortgages % Total impairment (writeback)/charge on loans and advances to customers* (41) % Impairment (writeback)/charge on repossessed assets: Impairment (writeback)/charge on repossessed assets: (1) % Total impairment (writeback)/charge (42) % Cost of risk ratio -0.1% 3.0% -3.1 ppts *includes impairment writeback/charge on assets held for sale. Total impairment charges on loans and advances to customers decreased by 968m, or 104%, from 927m for the year ended 31 December 2013 to a write-back of 41m for the year ended 31 December Total impairment charges on ROI residential mortgages have decreased by 759m to a write-back of 32m in the year ended 31 December This decrease was due to: (i) (ii) (iii) lower levels of new defaults and higher loan cures in 2014 reduced the impairment charge by a further 314m. in H2 2014, the Group also adjusted a number of key parameters in its impairment provisioning models resulting a net write-back of 130m namely; a. 280m reduction due to an adjustment of the peak-to-trough house price index assumption which was reduced by 5ppts (from 55%) while maintaining a buffer of c.10 percentage points (ppts) relative to the actual CSO HPI index which was at 38% in December 2014; b. 150m increase due to collateral realisation expectations being realigned and collateral sale haircuts increased from 10-20% to a minimum of over 20% to reflect developments and experience within the Irish property market in 2014; and 2013 included an additional charge of 315m arising from an incremental provision required by the 2013 CBI Balance Sheet Assessment. Total impairment charges on commercial mortgages have decreased by 173m to a write-back of 13m in the year ended 31 December 2014 primarily due to improved collateral valuations and reduced default experience. Total impairment charges on consumer finance have decreased by 25m to a write-back of 6m in the year ended 31 December 2014 primarily due to improved arrears performance. Total impairment charges on UK mortgages have decreased by 11m to a charge of 10m in the year ended 31 December 2014 primarily due to improved collections and recoveries and strengthening economic conditions in the UK. Cost of risk ratio reduced from 3.0% to -0.1% mainly as a result of the significant decrease in impairment charges resulting in a writeback. Repossessed Assets An impairment write-back of 1m was incurred in respect of repossessed assets. This compares to a write-down of 2m of the carrying value of repossessed properties to their estimated recoverable amount for the year ended 31 December The writeback in the year can be attributable to improvement in property prices in Ireland. Page 16

19 Operating and Financial Review Exceptional items Exceptional items for the year ended 31 December 2014 include 9m in relation to net loss on disposals of held for sale loans and advances. For the year ended 31 December 2013, net exceptional items were 309m, and included a one-time exceptional gain of 329m reflecting the reversal of the liability attributed to the Group's defined benefit pension schemes. In the year ended 31 December 2013, the Group also recorded 20m of restructuring costs. Taxation The taxation charge for the year ended 31 December 2014 is 54m. Taxation for the year ended 31 December 2013 included an exceptional credit for recognition of deferred tax assets on tax carries forward losses of 414m. Loss for the year Loss for the year decreased by 159m, or 61%, from 261m to 102m from the prior year due to the factors discussed above. Page 17

20 Operating and Financial Review Segmental Performance The following tables set out selected consolidated income statement data for the years ended 31 December 2014 and 2013 by Core Bank and Non-Core. The Group has three operating segments as outlined in note 3 to the financial statements namely, ptsb SBU, AMU and Non-Core. ptsb SBU and AMU are aggregated as Core Bank for the purposes of analysing the 2014 financial performance against the prior year which is set out below. In m Year Ended 31 December 2014 Core Bank Non-Core Total Interest income Interest expense (400) (204) (604) Total net interest income/(expenses) 275 (5) 270 Other banking income Net other operating (expense)/income (7) 3 (4) Total operating income 310 (2) 308 Total operating expenses including bank levy (341) (33) (374) Depreciation and amortisation of property and equipment and intangible assets (19) - (19) Gain on revaluation of property 4-4 Total operating expenses excluding exceptional items (356) (33) (389) Operating loss before writeback/(charge) for impairments and exceptional items (46) (35) (81) Impairment of loans and advances and repossessed assets 51 (9) 42 Operating profit / (loss) before exceptional items 5 (44) (39) In m Year Ended 31 December 2013 Core Bank Non-Core Total Interest income Interest expense (565) (204) (769) Total net interest income/(expenses) Other banking income Net other operating income/(expense) Total operating income Total operating expenses (266) (18) (284) Depreciation and amortisation of property and equipment and intangible assets (17) - (17) Gain on revaluation of property 1-1 Total operating expenses excluding exceptional items (282) (18) (300) Operating profit / (loss) before writeback/(charge) for impairments and exceptional items (50) 2 (48) Impairment of loans and advances and repossessed assets (644) (285) (929) Operating loss before exceptional items (694) (283) (977) In m 31 December December 2013 Non- Non- Key Balance Sheet Metrics Core Core Group Core Core Group Loans and advances to customers (Gross) 22,482 9,338 31,820 23,246 10,080 33,326 Loans and advances to customers (Net) 20,075 8,161 28,236 20,757 8,704 29,461 Non-performing loans ("NPLs") 6,153 2,155 8,308 6,639 2,486 9,125 Provision Coverage Ratio ("PCR")* 44.9% 58.0% 48.3% 43.7% 59.5% 47.2% The table above includes assets classified as held for sale *Provision coverage ratio is calculated as impairment provisions as a % of loans greater than 90 days in arrears and/or impaired. Page 18