DBRS Comments on Anglo Irish Bank’s Preliminary Annual Results

DBRS today has commented that all ratings for Anglo Irish Bank Corporation plc (Anglo Irish or the Bank), including its A (high) rating on Long-Term Debt maturing after 29 September 2010 and R-1 (high) rating for Short-Term Deposits maturing on or before 29 September 2010, are unaffected by the lower earnings for the year ended 30 September 2008.

This comment follows Anglo Irish’s preliminary annual results. The Bank reported reduced profit before tax of EUR784 million, down 37% from fiscal year 2007. Profit before tax was reduced as a result of volatility in financial markets, lending impairments, and a significant increase in general reserving. The rapid deterioration in the Irish and U.K. economies caused a significantly higher impairment charge on loans and advances to customers, which increased to EUR224 million, or 103 basis points (annualised) of average loans. The sizable increase from the prior year reflects the impact of the severe economic downturn in the Bank’s core operating markets and the effects of the credit environment, particularly on the residential development sector, which accounted for EUR165 million of the impairment charge. Further, the collapse of Lehman Brothers, Washington Mutual and the Icelandic banks resulted in losses and impairments totalling EUR34 million. Importantly, in light of the unprecedented changes in financial markets and the likely further impact of recessionary conditions, Anglo recorded a EUR500 million of collective provision. The collective provision reflects an allowance for potential losses in the loan book where there is currently no specific evidence of impairment on individual loans.

While profit before tax declined, Anglo reported that the company’s profit before impairments and fair value movements increased to EUR1.8 billion from EUR1.4 billion in 2007, representing an increase of 28.7% and reflecting the strength of the Bank’s underlying earning ability. Moreover, Anglo Irish reported an increase in net interest margin to 2.01% from 1.96% for 2007, which given the ongoing turmoil in the global credit markets and rising credit costs, DBRS considers an illustration of the strength of the Bank’s franchise. Anglo Irish’s continued focus on operating costs partially offset the increasing credit and funding costs as profitability was positively impacted by the decline in the Bank’s cost-to-income ratio to 17% from 22%.

Anglo Irish’s annual results remain within DBRS’s tolerance levels, given the current market environment, the strength of the Bank’s franchise and the measures taken by the Irish government to stabilise its banking system. DBRS expects that additional earnings pressure will persist in the near term as credit and funding costs remain elevated. Furthermore, the cost of the government guarantee, at about EUR115 million annually, is expected to further reduce earnings.

Anglo Irish’s funding and liquidity remain acceptable, with customer deposits rising 4% in the past year, ending at EUR51.5 billion. Near-term liquidity has been bolstered by the Irish government guarantee. To that end, Anglo Irish successfully issued EUR1.5 billion of new guaranteed debt on 2 December 2008. In DBRS’s view, the government actions have provided near-term support for the Irish banks as they cope with the highly disrupted market conditions and the challenges associated with the slower Irish economy and weakening housing markets.

DBRS acknowledges the steps that Anglo Irish is taking to strengthen its capital position in light of the challenging environment. To this end, the Bank has announced plans to suspend its dividend and to control growth in risk-weighted assets, which DBRS considers appropriate given the current environment. In addition, the capital position was bolstered by the increase in collective provisions (general reserves). Adding back these provisions, the regulatory core equity ratio increased to 6.7% (from 5.6%), or 5.9% excluding the provisions. Tier 1 and total capital ratios ended the year at 8.4% and 12.0%, respectively.

Anglo Irish’s ratings for non-guaranteed instruments continue to be underpinned by its well-established position in the Irish and U.K. markets as a property-secured lender to middle-market companies, its earnings generation ability, as well as the hands-on management of its growth in the Irish, U.K. and U.S. markets. Moreover, DBRS ratings also take into account the Bank’s relatively low level of revenue diversification and lack of a traditional retail bank network.
DBRS will continue to closely monitor Anglo Irish’s ability to absorb rising impairment charges and its efforts to strengthen its capital and liquidity profile while defending its franchise in the challenging operating environment.

Note:
All figures are in euros unless otherwise noted.

The applicable methodology is Analytical Background and Methodology for European Bank Ratings, Second Edition, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.