DBRS Comments on Proposed NAMA and ELG, Allied Irish Banks Ratings Unaffected, Senior at AA, UR-Neg.

DBRS has today commented that the ratings of Allied Irish Banks p.l.c. (AIB or the Bank), including the AA rating on Long-Term Debt and Deposits maturing after 29 September 2010 are unaffected following the announcement by the Irish Government of the National Asset Management Agency (NAMA) Act of 2009 (the Act) and the Credit Institutions (Eligible Liabilities Guarantee) Scheme of 2009 (the ELG Scheme). The ratings of the Long-Term Debt and Deposits maturing after 29 September 2010 remain Under Review Negative, where they were placed on 9 March 2009. The Short-Term Deposits and Short-Term Debt maturing on or before 29 September 2010 ratings remain at R-1 (high), with a Stable trend. The ratings of AIB’s Long-term Deposits and Long-Term Debt maturing on or before 29 September 2010 remain at AA (high), with a Negative trend, reflecting DBRS’s internal assessment of the Republic of Ireland.

Today’s comment follows the 16 September release by the Irish Department of Finance which indicated that by mid-2010, NAMA is expected to purchase loans with a book value of approximately EUR 77.0 billion from five Irish Banks, including AIB. AIB is expected to transfer loans with an estimated book value of EUR 24.0 billion to NAMA. The NAMA draft legislation provides the Irish banks the mechanism by which the banks can de-risk their balance sheets by removing certain, and often distressed assets, primarily land and development loans and related loans from their balance sheets. The loans will be acquired at a discount from book value, which, on average is estimated to be circa 30%. DBRS notes that this 30% “haircut” is only an industry-wide estimate and the discount will vary from loan-to-loan and thereby could be significantly different from institution-to-institution.

While in the long-term, DBRS believes that AIB will benefit from this transfer, in the near-term, however, the Bank will experience a level of earnings and capital pressure owed to the realisation of losses associated with the proposed transfer. However, given the quality and composition of the estimated EUR 24.0 billion book of loans, DBRS believes that it is possible that the “haircut” could be slightly below the anticipated industry average discount. DBRS will monitor the “haircut” which will only be known on completion of transfer. Moreover, the projected EUR 3.5 billion of impairment provisions on the relevant loans by year-end 2009 will also temper the impairment. Nonetheless, AIB will likely record a noteworthy write-down, which, based on the Government’s estimates, is estimated by the Bank to be c. EUR 3.7 billion. This will have a negative impact on capital levels during the transfer period, which is expected to last until mid-2010. DBRS’ review will consider the ultimate impact of the NAMA transfer, its impact on capital and the Bank’s ability to replenish the capital, as needed.

Although capital levels may be reduced by the losses recorded associated with the transfer, the risk shedding benefits of NAMA will reduce the level of risk-weighted assets (RWA) on the Bank’s balance sheet, thereby reducing the ultimate level of capital required. However, 5% of the total consideration paid to AIB is expected to be in the form of subordinated bonds, thereby providing NAMA a level of loss absorption should the NAMA assets not perform to expectations. Future impairments of these bonds may negatively impact the Banks’ capital.

Considering, the anticipated benefits of NAMA and the other support mechanisms put into place by the Irish Government, DBRS believes that AIB will be successful in generating any needed capital through market sources. However, bearing in mind the statements of the Irish Government, and DBRS’s view that AIB is a critically important banking organisation in Ireland, DBRS would expect that, in the event of a capital raising difficulty, the Government would provide any needed capital to the Bank, should it be required.

Liquidity will also benefit from the proposed NAMA. By removing the larger, less liquid, and often distressed assets from the bank’s balance sheets, NAMA is expected to provide a level of liquidity relief to the banks. Moreover, the senior bonds which are received by the banks, in consideration of the transfer, are expected to be “pledgeable” collateral for central bank funding facilities, which could provide a low cost means to additional liquidity. Further, the improved liquidity position of the banks may drive a level of stabilisation for deposit margins owed to reduced competition for deposits, thereby potentially lowering the costs of deposits for the Irish banks.

Additionally, DBRS sees the Bank’s liquidity position benefiting from the Irish Government’s proposed ELG legislation. The proposed ELG Scheme provides covered institutions, which includes AIB, the option to issue government guaranteed securities with maturities beyond 29 September 2010, the expiry for the current government guaranteed debt scheme (the CIFS Scheme). The proposed ELG Scheme allow guarantees for deposits, commercial paper, certificates of deposit, and senior unsecured debt with maturities up to five years, incurred by participating banks from the Commencement Date until 29 September 2010. The lengthened guarantee period of the proposed ELG Scheme should enhance AIB’s ability to improve the duration of the Bank’s funding profile and ladder its maturity schedule to reduce refinancing risk.

Longer term, DBRS sees AIB’s prospects as benefiting from the proposed legislation, as much of the uncertainties surrounding the impairments related to these assets will be limited and liquidity is expected to the further enhanced. Yet the economic landscape in Ireland causes a level of concern. DBRS remains concerned that the outlook for a prolonged recessionary environment of substantial depth in Ireland will negatively impact AIB’s future earnings generation ability. Credit loss provisions are expected to remain elevated, while the costs of the current government guarantee and the proposed guarantee should the Bank participate, will further pressure 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 costs. DBRS continues to monitor the ability of the Bank to navigate the current crisis without suffering permanent damage to its earnings generation power or franchise, which are key factors underpinning AIB’s rating.

The Negative trend on the long-term guaranteed debt reflects DBRS’s internal assessment on the sovereign and DBRS’s view that, although Ireland’s most recent plans to stabilise public finances, contain the economic downturn, and restructure distressed bank loans might succeed, however, downside risk remain. Should significant financial sector or fiscal deterioration occur, DBRS could take negative rating action on the internal sovereign assessment. Conversely, if Ireland’s policy measures help to stabilise the bank balance sheets and restore investor confidence, DBRS would likely return the trend to Stable.

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.