DBRS Downgrades Irish Guaranteed Debt Issued by the Bank of Ireland to AA (high), Trend Negative

DBRS today has downgraded the long-term ratings of the Irish Government Guaranteed instruments issued by The Governor and Company of the Bank of Ireland (Bank of Ireland or the Bank). This rating action impacts the Long-Term Deposits and Long-Term Debt maturing on or before 29 September 2010, which have been downgraded to AA (high) from AAA. The trend is Negative. Concurrently, the long-term ratings have been removed from Under Review with Negative Implications where they were placed on 9 March 2009. DBRS has confirmed the Short-Term Deposits and Short-Term Debt maturing on or before 29 September 2010 ratings at R-1 (high), with a Stable trend. Today’s rating action does not impact the ratings of Bank of Ireland’s Long-term Deposits and Long-Term Debt maturing after 29 September 2010, which remain Under Review with Negative Implications.

The downgrade of the eligible instruments guaranteed by the Irish government, under the Credit Guarantee Scheme of 2008, reflects the outcome of DBRS’s review of its internal assessment of the sovereign. The lowering of the internal assessment of the Republic of Ireland considers a sharp increase in the deficit and public debt, high government exposure to a still unstable banking sector, contingent liabilities in the form of deposit guarantees, and the likelihood of a further rise in public debt from the proposed National Asset Management Agency (NAMA). Irish Government bonds will be issued in exchange for the transfer of distressed property-related bank loans to NAMA.

The Negative trend on the guaranteed debt reflects DBRS’s view that although, Ireland’s most recent plans to stabilise public finances, contain the economic downturn and restructure distressed bank loans through NAMA might succeed, the downside risk of further bank recapitalisation needs is high. Should significant financial sector or fiscal deterioration occur, DBRS could take further negative rating actions on the internal sovereign assessment. If on the other hand Ireland’s policy measures help to stabilise bank balance sheets and restore investor confidence, DBRS would likely return the trend to Stable.

DBRS remains concerned that the outlook for a prolonged recessionary environment of substantial depth in Ireland will negatively impact the Bank’s future earnings generation ability. Credit loss provisions and funding costs are expected to remain elevated, while the cost of the government guarantee will further reduce earnings. Accordingly, DBRS’s review will focus on the Bank’s ability to generate pre-provision earnings sufficient to offset the anticipated heightened levels of credit and funding costs.

DBRS’s ongoing review related to the Company’s nonguaranteed debt will also assess the impact of the recently announced Irish government scheme to remove circa EUR 80.0 to 90.0 billion of land and development loans and certain property investment loans from the balance sheet of Irish banks, including Bank of Ireland, through a newly established agency, NAMA. NAMA is expected to purchase the loans from the banks at a discount. As such, DBRS review will focus on the acceleration in recognising losses that will be of the result of the scheme and the impact on the Bank’s capital base. Importantly, DBRS continues to expect that the Irish Government will continue to take the necessary steps to keep its Critically Important Banks well capitalized.

Further, DBRS’s review will focus on the long-term impact on earnings of the NAMA transaction, as the initiative calls for NAMA to purchase all land and development loans and certain property investment loans. While DBRS recognises the positives in removing the higher credit risk loans, the removal of all land and property development loans, including performing loans, will likely have a negative impact on Bank of Ireland’s operating revenues, at a time when the Bank’s ability to generate sizeable income before provision and taxes (IBPT) to absorb losses is paramount.

Notes:
All figures are in EUR unless otherwise noted.

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.