DBRS Assigns Issuer and Long-Term Debt Ratings of BBB (high) to Irish Life & Permanent plc

DBRS has today assigned an Issuer and Long-Term Debt rating of BBB (high) to Irish Life & Permanent plc (IL&P or the Group). The Trend is Stable. Concurrently, DBRS has assigned a rating of R-1 (high) to Short-Term Deposits and Short-Term Debt maturing on or before 29 September 2010. Further, DBRS has assigned a rating of AA (high) to Long-Term Deposits and Long-Term Debt maturing on or before 29 September 2010. The trend on the aforementioned guaranteed long-term ratings is Negative. The trend on the short-term ratings is Stable.

The ratings of IL&P reflect the Group’s strong domestic franchise, which is defined by its dual (insurance and banking) business model, more traditional loan book, and position within the Irish banking and insurance marketplace. DBRS views IL&P systemically important to the Irish banking sector as evidenced by its inclusion as a participating financial institution in the Credit Guarantee Scheme of 2008, put in place by the Irish Government in September 2008. This view is reflected in the overall rating level and DBRS’s SA-2 support assessment. Offsetting these strengths is the financial impact of the continued elevation in impairments on its retail lending loan book, reduced near-term earnings generation ability, wholesale nature of the funding model, and impact of the overall difficult operating environment. IL&P’s concentration in the Irish and U.K. residential mortgage lending markets leaves the Group vulnerable to further deterioration in the Irish and U.K. economies and to further erosion in home price values.

IL&P has a solid business franchise. The Bank’s position as the largest life assurance provider in Ireland, its leading position in fund management, and its leading market share in residential mortgage lending underpin the sound domestic franchise, which is a factor that supports the rating.

Profitability and earnings generation ability remain challenged. IL&P’s profitability has been weakened due to the deteriorating economic conditions in Ireland and, to a lesser extent, the U.K. Further, reduced investor confidence, which has reduced new business volumes in both the lending and insurance businesses, has impacted IL&P’s earnings generation ability. IL&P reported a pre-tax loss of EUR 220 million for H1 2009 compared to a pre-tax profit of EUR 212 million for the comparable period a year ago. Importantly, the Group’s underlying earnings (defined as income before impairments, volatility related to the insurance business and taxes (on an embedded value basis)) declined 56% to EUR 138 million. This decline illustrates the depth of the economic downturn in Ireland and the overall noteworthy impact it has had on IL&P’s earnings generation ability. Lower earnings were attributed to higher impairment costs, reduced consumer activity, and weak new life and pension sales, as well as negative persistency in the life assurance in-force book. While the insurance businesses provides a level of diversification, this business also adds volatility to underlying earnings, owed to volatile asset valuations and changes in client activity. Given the outlook for a prolonged period of high unemployment, stressed household cash flows and reduced investor confidence, DBRS expects IL&P’s earnings to remain pressured over the near-term.

DBRS considers IL&P’s risk profile as manageable. The Bank’s risk profile and its lower risk appetite is reflected in the focus on more traditional retail banking and secured lending. As a result, the Group has little exposure to many of the assets classes that have been primary drivers of bank losses during the crisis. Unlike its larger domestic peers, IL&P did not have a presence in the problematic land and development finance lending sector. Therefore it will not participate in the Irish Government’s National Asset Management Agency (NAMA) plan, which is designed to remove land and property development (and related) loans from the banks’ balance sheets, at a sizeable discount. DBRS views the lack of this lending as a positive, given the loss experience with these loans; however, IL&P has significant exposure to the troubled U.K. buy-to-let market and the Irish residential mortgage market, which is under pressure due to the steep economic downturn. While this loan book is more granular and does not contain large outsized items, this book may prove particularly problematic given the sizable declines in property valuations and the prospect of a prolonged recovery. Managing the loan book, given the expected higher credit costs associated with the current credit cycle and the resulting earnings pressure is a key challenge.

IL&P is highly concentrated in wholesale funding. The Group’s liquidity position, however, has been enhanced by the actions taken by the Irish Government. Moreover, IL&P maintains a deep pool of collateralised assets which are capable of being repo-ed to counterparties; including the European Central Bank (ECB). This has proven quite beneficial during the past few quarters. Indeed, at 30 June 2009 the Group had EUR 12.0 billion of drawings outstanding from the ECB. Wholesale funding has been a significant component of funding, as evident by the Group’s elevated loan-to-deposit ratio of 307%, which is substantially higher than its domestic peers. The Group intends to transform its funding model to be more deposit centric and balanced. DBRS expects that, given the competition for deposits in Ireland, this transformation will be a lengthy and costly transition to be achieved over the longer-term. The expected improvement in access to liquidity for Irish banks, that should result from NAMA; as well as the recently proposed Credit Institutions (Eligible Liabilities Guarantee) Scheme of 2009 (the ELG Scheme), will likely help IL&P with these efforts and provide the necessary time and liquidity to successfully transform its funding model.

Capital is adequate, with a Core Tier 1 ratio of 9.3%, including the 23% internal capital requirement (ICR) add-on for Basel Pillar II. Unlike its larger peers, IL&P has not received capital injections from the government, but given DBRS’s SA-2 support assessment, DBRS believes that the Irish government would provide capital to IL&P, should it be required.

The Stable trend reflects DBRS’s expectation that IL&P will make progress in transforming its funding mix and will effectively manage through the difficult operating environment. Support from the Irish government, whether it be in the form of liquidity enhanced through the guarantee scheme or potential capital support, is key to the rating and rating stability.

Note:
All figures are in EUR unless otherwise noted.

This rating is based on public information.

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.