West Bromwich 6.15% PIBS

''With regards to the resumption of interest payments, it will be necessary for the losses that the Society has reported since the 31 March 2009 financial year end (and any subsequent losses reported) which have been written down against the Profit Participating Deferred Shares (PPDS) to be made good. From that point onwards, up to 25% of any net profits will be paid to PPDS holders and the Board then has the discretion to pay PIBS holders interest which is equivalent to the rate paid to PPDS holders up to a maximum of 6.15%.''

It could be a very long time before The West Bromwich make any payment on these PIBS, based on there recent above statement. its on the West Bromwich website

An original £75 million pibs were issued so I make that £4.6Million interest a year.
There are now £182.5million PPDS notes in issue.
I have been trying to find accumulated profit and losses for West Bromwich Building Society linked to the ppds and therefore pibs it appears accumulated losses of £99million stand against these shares the last 2 years of stated profits of £14.5million reduce this to £84.5Million. So if West Bromwich continues to make profits of £12million a year in 7 years they may make a payment on the PIBS.

They only have to pay 25% of profits out to shareholders, so in 7 years time they may make a dividend or coupon payment of 1.1pence per pib and ppds.

I wonder what peoples views are on the PIBS? I have held them since issue and wonder if I should not just sell them at the current 46p or have I missed something I just do not understand? Is there more value to these PIBS than I realise.

With potential income of 1.1 p in 7 years ''and the board then has the discretion'' my bear case for the PIBS is 5p.

I note the board of directors salaries and benefits are massive compared to profits from the building society or am I just jealous as the £738 income I used to receive from my 12000 PIBS was a nice little sum but is dwarfed by directors pay.

I would love to hear peoples views and opinions, if they are as bad as mine, let me know first so I can head for the exit. If I have missed the point or my facts are wrong let me know and I can look forward to a healthier retirement.

Comments

  • I own both the PPDS and PIBS (at below the current prices) and although I haven't looked at them in detail recently I would make the following points:

    1) You are right that payment on the PIBS is dependent on payment on the PPDS.

    2) On page 14 of their latest annual report it shows the PPDS are carried at 177.1mil. I.e .They have been written down from 182.5 so need to be written up by only £5.4million before they are eligible to start paying.

    3) As only a quarter of profits/ losses after tax are attributable to the PPDS that means they need to make a profit of 4 X £5.4 X 1.20 (assuming corporation tax of 20%). That makes £25.92mil.

    4) You can see that for last years efforts (also page 140) the PPDS have been written up from 174.7 to 177.1. That is £2.4million. Using the same formula, 2.4 X 4 X 1.20 = £11.52 million of pre tax profits. The actual figure was £12.4 million so the maths roughly works (I am sure there are lots of small variables that alter the figures).

    5) The crucial last reported net interest margin is 1.15% (up from 0.43% in 2011) and lending is starting to go. Their figures may not be up to the likes of the challenger banks (One Saving has a NIM of 3.7% according to Numis). However, we are in a period of high margins, low arrears and banks, providing they can escape from historic pre-crisis books, can make plenty of hay at the moment. From here the outlook may deteriorate but these banks/ building societies have plenty of cushion and should continue to make good returns on their equity.

    6) A cost income ratio of 82% is too high (nearer 50% would be ideal) but this is partly the result of the asset base having shrunk. They are now looking to grow assets.

    I think therefore it reasonable to expect that the PPDS/ PIBS might start paying in a couple of years. I would think there is every chance they can increase their profit from here. Sticking my finger in the air and assuming a modest improvement in NIM, final closure of the disastrous commercial lending division and an improvement in the cost income ratio, I think it would not be unreasonable to expect a profit of £25million. [One Savings Bank made £64million on £4.9bn of assets at end 2014].

    £25 million = coupon on the PPDS of 2.86% = coupon on the PIBS of 2.86%. Over time this may grow.

    Finally, at the point the PIBS resets in 2021 the bond ceases to count as capital (it may count as tier 2 capital). I know the Society is aware of this. Therefore rationally while the bond is where it is they should consider a buy back. However, I have no information that they are thinking about this and I would guess it would not be at the top of their to-do list.

    My conclusion, therefore, is hold on; there are good chances of further gains to come. My only annoyance is that I did write most of a piece for Bond of the Week recommending a buy when it was trading at 21%. However, I got way laid, the price shot up and I decided therefore not to publish it.
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