DBRS Places Long-Term Ratings of Allied Irish Banks Under Review – Negative

DBRS has today placed the long-term ratings of Allied Irish Banks p.l.c. (AIB or the Bank), Under Review with Negative Implications, including its AA ratings for Long-Term Deposits and Long-Term Debt maturing after 29 September 2010 and the AAA ratings for Long-Term Deposits and Long-Term Debt maturing on or before 29 September 2010. The R-1 (high) Short-Term Debt and Short-Term Deposits ratings are unaffected by today’s ratings action.

The rating action on the Long-Term Deposits and Long-Term Debt maturing after 29 September 2010 (unguaranteed debt) considers the accelerated deterioration in the operating environment in the Bank’s core markets. Moreover, today’s rating action considers DBRS’s view that the deterioration in the operating environment in the Bank’s core markets has intensified further since year-end 2008. Although AIB’s 2008 preliminary results revealed acceptable performance, given the operating environment, DBRS expects earnings pressure to intensify in 2009, as provisions for loan and receivable impairments will likely remain at elevated levels for the near to mid-term.

DBRS is concerned that the weakening economic environment, rising unemployment and the continuing weakness in the Irish and U.K. housing markets will result in noteworthy earnings pressure and a temporary reduction in the Bank’s earnings generation ability. In DBRS’s opinion, the continued decline in asset values and the uncertainty as to the severity and duration of the recession in AIB’s core markets will drive loan impairments higher, reducing the Bank’s near to mid-term financial performance. Moreover, the deteriorating credit environment further exacerbates these concerns. DBRS does not see relief to these pressures in 2009. Accordingly, DBRS’s review will focus on the Bank’s ability to generate pre-provision earnings sufficient to offset a heightened level of credit costs and to what extent credit costs may exceed pre-provision earnings. Ultimately, DBRS will review the ability of the Bank to navigate the current crisis without suffering permanent damage to its earnings generation power or franchise, both of which are factors which underpin the intrinsic rating.

DBRS fully recognises both the intent and extent of governmental support afforded to AIB and the Irish banking system. This support is factored in the SA2 support assessment for AIB, which allows its final ratings to be higher than its intrinsic rating. Moreover, the governmental support is reflected in DBRS’s designation of AIB as a Critically Important Bank (CIB) for the Irish Banking system. DBRS has assigned floor ratings of A (high) for long-term obligations and R-1 (middle) for short-term obligations at the bank level and of ‘A’ for long-term obligations and R-1 (middle) for short-term obligations at the bank holding company level for CIBs in Ireland. The trend for these floor ratings is Stable. The level of the floor rating reflects DBRS’s expectation that that the Irish government will provide support, if necessary, to prevent any CIB from weakening below this rating level. Accordingly, the designation of AIB as a CIB limits any potential downgrade to the floor rating.

The Under Review with Negative implications status on the government guaranteed debt considers DBRS’s concerns that the deterioration in economic prospects and the lower than expected tax revenues during the first two months of 2009 may lead to a change in DBRS’s internal assessment of the Republic of Ireland.

Notes:
The applicable methodologies are, Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.