DBRS Downgrades Allied Irish Banks p.l.c. to AA (low), Trend Negative

DBRS today has downgraded the Long-Term Deposits and Long-Term Debt maturing after 29 September 2010 ratings of Allied Irish Banks p.l.c. (AIB or the Group) to AA (low) from AA. Today’s action completes DBRS’s review and as such, 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 Group’s Short-Term ratings of R-1 (high), with Stable trend and the AA (high) rating on the Long-Term Deposits and Debt maturing on or before 29 September 2010. The trend on all short-term ratings remains Stable, while the trend on all long-term ratings, including the Guaranteed debt is Negative.

Today’s rating action reflects DBRS’s view that AIB’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. Moreover, spread income is expected to remain under pressure owed to elevated deposit and wholesale funding costs. AIB recently increased its expected bad debt provision for 2009 by EUR 1.0 billion, to approximately EUR 5.3 billion evidencing the continuing deterioration of credit conditions, particularly in Ireland. Given the Group’s anticipated pre-impairment operating profit for 2009 of EUR 2.0 billion, the anticipated pre-tax loss for 2009 will be approximately EUR 3.3 billion. DBRS expects the Group to report a pre-tax loss for 2009 and 2010.

Moreover, the transfer of approximately EUR 24.2 billion of eligible loans to NAMA will reduce earnings as loans will be transferred at a discount to carrying value. Given the Minister’s guidance of an industry average discount to carrying value of 30%, DBRS estimates that AIB could incur a loss on the transfer of loans of circa EUR 3.0 billion. This estimate considers the expected EUR 4.2 billon of provisions provided for the loans as of 31 December 2009. DBRS is mindful that the final cost to AIB will not be determined until the valuation process and asset transfer is complete. Nonetheless, the aforementioned expected losses will reduce capital levels, and as such, recapitalisation measures will be required. AIB has indicated that it believes the recapitalisation required would be of the order of EUR 2.0 billion.

Importantly, the unguaranteed ratings reflect DBRS’s view that AIB’s franchise remains very solid. The Group continues to make progress in gathering deposits, which increased 1% in Q3 2009. Recently, the Group successfully issued two transactions totalling EUR 1.75 billion in 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. Also, the Negative trend reflects the potential downside risk that charges related to the transfer of loans to NAMA may exceed DBRS’s current expectations. Finally, the Negative trend reflects the uncertainties surrounding any potential conditions set forth by the European Commission related to the 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.