DBRS Downgrades Bank of Ireland to AA (low), Trend Negative

DBRS today has downgraded the Long-Term Deposits and Long-Term Debt maturing after 29 September 2010 ratings of The Governor and Company of the Bank of Ireland (Bank of Ireland or the Group) to AA (low) from AA. These ratings have been removed from Under Review with Negative Implications, where they were placed on 9 March 2009. Concurrently, DBRS has confirmed the ratings of debts, which are guaranteed by the Irish Government, including the R-1 (high) Short-Term ratings and the AA (high) rating on the Long-Term Deposits and Debt maturing on or before 29 September 2010 rating. The trend on the short term debt rating is Stable while the trend on all long-term debt, including the Guaranteed debt is Negative.

Today’s rating action completes DBRS’s review and reflects DBRS’s view that the Bank of Ireland’s earnings generation ability has been negatively impacted by the ongoing elevated level of impairments and reduced lending activity and banking product demand owed to the ongoing economic downturn in Ireland. To this end, total impairment provisions, excluding NAMA related charges, for the three-year period ending 31 March 2011 are projected to total EUR 4.6 billion, of which EUR 1.8 billion have already flowed through the P&L. Moreover, spread income is expected to remain under pressure given the elevated deposit and wholesale funding costs. DBRS expects the Group to be loss-making well into the Group’s fiscal year ending 31 March 2011.

Moreover, the transfer of up to EUR 16.0 billion of eligible loans to NAMA will reduce earnings as loans will be transferred at discount to carrying value. The Group estimates that losses could be as high as EUR 3.4 billion, considering the EUR 1.4 billion impairment provisions already provided for as of 30 September 2009. This also assumes the 30% average discount to carrying value put forth by the Minister of Finance. DBRS is mindful that the final cost to the Bank of Ireland will not be determined until the valuation process and asset transfer is complete, which is a factor in the Negative trend. Nonetheless, the aforementioned expected losses would negatively impact capital levels, and as such, recapitalisation measures will be required.

Importantly, the unguaranteed ratings reflect DBRS’s view that the Bank of Ireland’s franchise remains very solid. Deposits increased 4% over the six months ending 30 September 2009, to EUR 87 billion. Furthermore, the Group has successfully issued into the non-guaranteed, unsecured wholesale markets, which speaks to the strength of the franchise. Going forward, DBRS expects that liquidity in the Irish banking sector will improve with the enactment of NAMA, as the government bonds received in consideration for the transfer of loans will be eligible collateral for liquidity facilities with the monetary authorities. Moreover, the recent enactment of the ELG scheme, which continues the government guarantee on certain types of debt, will add stabilisation to liquidity and the banking sector.

The Negative trend on the non-guaranteed long-term debt and deposits reflects the downside risks associated with the impact of the ongoing stressed economic environment and DBRS’s view that any recovery is likely to be prolonged. In addition, the Negative trend reflects DBRS’s concerns of the uncertainty as to the timing of the anticipated recapitalisation. Finally, the Negative trend reflect the uncertainties surrounding any potential conditions set by the European Commission related to Group’s restructuring given the receipt of State Aid, and the ultimate impact on the strength of the franchise, which is a key consideration in the current rating level.

The Negative trend on the long-term guaranteed debt and deposits reflects DBRS’s internal assessment of 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 risks remain.

Note:
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.

This is a Corporate (Financial Institutions) rating.