ar-2013

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Risk Management Principal Risks and Uncertainties Set out below are the risk factors that could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects in the next 12 months. The risk factors discussed below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties as there may be risks and uncertainties of which the Group is not aware or which the Group does not consider significant but which in the future may become significant. As a result of the challenging conditions in financial markets in the euro zone and continuing weakness in the Irish and UK economies, the precise nature of all risk and uncertainties that it faces cannot be predicted as many of these risks are outside the Group’s control. Reference is also made to the disclaimer in respect of Forward Looking Statements set out on the inside front cover. Government Control and Intervention The Irish Government is the majority owner of the Group as the holder of in excess of 99% of the Group’s issued share capital. The Credit Institutions (Stabilisation) Act 2010 (the “Stabilisation Act”), signed into law in December 2010, provides extensive powers to the Minister for Finance to recapitalise and restructure the Irish banking industry including, but not limited to, the disposal of assets by a relevant institution, assuming the shareholder powers of a relevant institution, and directing the drawing up of restructuring plans by a relevant institution. In exercising these powers, the Minister for Finance can apply to the High Court, following consultation with the Governor of the CBI and a relevant financial institution, including the Group. The introduction of the Stabilisation Act has created a mechanism for State intervention in the banking industry to an unprecedented degree which could have a significant adverse impact on the Group’s operations. The Minister for Finance has the power to seek direction orders, special management orders, subordinated liabilities orders and transfer orders from the Irish High Court (“Orders”) under the Stabilisation Act. The Minister for Finance may seek an Order only if the Minister for Finance has consulted with the CBI and is of the opinion that making the Order is necessary in accordance with the provisions of the Stabilisation Act. The Minister for Finance must apply to the Irish High Court ex parte for approval of the relevant Order. The Minister for Finance has obtained three such Orders in relation to the Group. Two of the three Orders are currently the subject of legal proceedings in the Irish Courts, in which the applicants are a number of Group shareholders. and resolution of distressed credit institutions. The Resolution Act applies to banks, building societies and credit unions licensed in Ireland other than those entities which are relevant institutions under the Stabilisation Act. The liquidation powers under the Resolution Act also apply to relevant institutions under the Stabilisation Act. The introduction of new policies or the amendment of existing policies by the Government or the introduction of revised capital or deleveraging targets by the CBI may materially adversely affect the Group’s business and financial condition. Policies in respect of the banking sector, including its supervision, regulation, capitalisation and structure, have and will continue to have a major impact on the Group. There can be no guarantee that the current policies will be continued. In addition, current and future budgetary policy, taxation and other measures adopted by the State to deal with the economic situation in Ireland may have an adverse impact on the Group’s customers’ ability to repay. Capital Management Capital adequacy, and its effective management, is critical to the Group’s ability to operate its businesses and to pursue its strategy. The Group’s business and financial condition could be affected if the amount of capital is insufficient due to materially worse than expected financial performance (including for example, reductions in earnings as a result of impairment charges, increases in risk weighted assets and timing of disposal of certain assets and/or the minimum regulatory requirements imposed on the Group, the manner in which existing regulatory capital is calculated, the instruments that qualify as regulatory capital and the capital to which those instruments are allocated, could be subject to change in the future). EU Restructuring Plan As a result of the investment made by the Irish Government on 27 July 2011 the Group submitted a restructuring plan (“EU Restructuring Plan”) to the European Commission on 31 July 2011, for approval under the EU’s State aid rules. The strategic plan for the Group has been endorsed by the Irish Authorities and has been formalised into a Restructuring Plan in line with State Aid rules and this was submitted to the European Commission at the end of June 2012 for their approval. Permanent tsb subsequently received favourable feedback from the Troika and, as part of the approval process, permanent tsb was asked to submit an Updated Financial Forecast to the European Commission’s Directorate General for Competition (DG Comp). This updated plan was submitted to DG Comp in August 2013 by the Department of Finance. The CBI and Credit Institutions (Resolution) Act 2011 (the “Resolution Act”) passed into law on 20 October 2011, establishes a framework to facilitate the orderly management Page 22
Risk Management The European Commission is required to consider whether the EU Restructuring Plan demonstrates the Group’s long‐term viability without reliance on State support, that there is adequate burden sharing by the Group (and its equity/debt capital holders) and that measures are taken to limit distortions of competition arising from the State aid. The Group could be subject to a variety of risks arising from this review, as the European Commission could impose conditions on the Group in connection with the approval of the EU Restructuring Plan that could include (without limitation): Rejection of the Group’s EU Restructuring Plan on the basis that it does not adequately demonstrate the long term viability of the Group, as a result of which the Group would need to be broken up; Compelling the Group to reduce its balance sheet substantially, including through disinvestment of certain businesses, brands or the Group’s branches in addition to those already anticipated; and/or Imposing certain behavioural restrictions on the Group, which could include: I. prohibiting the Group from doing business on more favourable terms than other market participants; II. prohibiting the Group from providing certain products to certain markets or segments of markets; III. restricting the Group’s ability to pay dividends on shares or interest payments on debt securities, including hybrid capital instruments; or IV. prohibiting proposed mergers or acquisitions by the Group in Ireland, the United Kingdom and/or in other markets. The EU Restructuring Plan, to be agreed with the European Commission, may also give rise to additional costs related to the legal and financial assessment of potential transactions for the Group. Its implementation may also result in increased operating and administrative costs for the Group. Even though there has been sign of improvement, these factors have significantly affected, and may continue to affect, the Group’s customers and, as a consequence, the demand for, and supply of, the Group’s products and services and in turn the Group’s results, financial condition and prospects. The magnitude of the fiscal adjustment agreed under the EU/IMF Programme, in addition to the low level of consumer and business confidence resulting from the economic downturn, continuing high unemployment, decreases in asset values and declining business activity, is impacting economic activity in Ireland. The Group has already suffered significant losses due to the increased risk of default and the impact of declining asset values on the value of collateral. The Group has also experienced reductions in business activity, increased funding costs and funding pressures, decreased asset values, decreased sales, additional writedowns and impairment charges with consequent adverse effects on its results of operations and financial condition. The precise nature of all the risks and uncertainties the Group faces as a result of the economic outlook is difficult to predict, as many of the items are outside the Group’s control. European Union In addition to the specific risks associated with Ireland and the UK discussed above, economic, monetary and political conditions and stability remain uncertain in the EU. If economic and financial conditions in the EU or the euro zone component of the EU deteriorate, or if fears persist that one or more EU/euro zone members will default or restructure its or their indebtedness, or if euro zone members are forced or choose to withdraw from the euro, the cost and availability of funding available to European banks, including the Group, may be affected, or such events could otherwise materially adversely affect the Group’s business, financial condition and results of operations, including the value of its assets. Any of the above factors in the context of the EU Restructuring Plan could have a materially adverse effect on (among other things) the Group’s business and financial condition. Economic Conditions Ireland and the UK The Group’s businesses are subject to the inherent risks arising from the macroeconomic and other general business conditions in Ireland and the UK where its business operations are located and also in the wider euro zone economies. Adverse developments, such as the continued relative downturn in economic activity, has resulted in a decline in demand for business products and services, weak consumer confidence, lower personal expenditure and consumption, increases in debt service burden of customers and limitations on the general availability of credit. Page 23
Page 2 and 3: Forward Looking Statements This doc
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ar-2013

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