DBRS Downgrades Allied Irish Banks p.l.c. - Senior at BBB (low)

DBRS Inc. (DBRS) has today downgraded the Non-Guaranteed ratings, including the Non-Guaranteed Long-Term Deposits and Non-Guaranteed Long-Term Debt ratings of Allied Irish Banks p.l.c. (AIB or the Group) to BBB (low) from A (high). Concurrently, the Non-Guaranteed Short-Term Deposits and Non-Guaranteed Short-Term Debt ratings have been downgraded to R-2 (low) from R-1 (middle). The trend on all long term debt and deposit ratings is Negative. To reflect DBRS’s downgrade of the long-term ratings of the Irish Government, guaranteed instruments issued by AIB are downgraded to “A” from A (high). Concurrently, DBRS has downgraded the ratings of Short-Term Deposits and Short-Term Debt Guaranteed by the Irish Government to R-1 (low) from R-1 (middle). The trend on the long-term guaranteed ratings is Negative, while the trend on the short-term guaranteed ratings is Stable. This rating action follows DBRS’s downgrade of the Republic of Ireland to “A” with a Negative trend. For a full list of the rating actions, please see table below.

In lowering the Non-Guaranteed Long-Term Deposits and Non-Guaranteed Long-Term Debt ratings, DBRS has removed the critically important banking organisation (CIB) status from AIB, as well as the floor rating concept for the banking sector in Ireland. In DBRS’s opinion, the Irish Government no longer has the ability to support its CIBs at the level of the floor as defined by DBRS, which is A (high) for long-term debt and deposits and R-1 (middle) for short-term debt and deposits at the bank level. Accordingly, DBRS now sees the floor concept as no longer applicable in Ireland. Nevertheless, DBRS is maintaining the SA-2 Support Assessment for AIB. The SA-2 designation reflects DBRS’s expectation that some form of timely systemic support would continue to be provided to the Group. DBRS views the statements made by the Government that AIB will remain one of the two pillar banks in the Irish Banking system as further supporting this perspective.

Today’s ratings action reflects the challenges the Group faces in potential loan losses and its need for substantial capital that is reflected in the amount of additional capital required to be raised by AIB as a result of the Prudential Capital Assessment Review (PCAR) and the Prudential Liquidity Assessment Review (PLAR) conducted by the Irish Central Bank (the Central Bank). As a result of these stress tests, AIB’s total capital requirement is EUR 13.3 billion, of which EUR 10.5 billion is required for the Group’s core Tier 1 ratio to be maintained above 10.5% in the base scenario and 6% in the stress scenario. The remaining EUR 2.8 billion is a capital buffer of which EUR 1.4 billion is to be in the form of equity and EUR 1.4 billion in the form of contingent capital. Given the scale of the current capital raise requirement and the difficult operating environment in Ireland, DBRS does not foresee AIB as successfully raising the majority of this capital from private parties and, as such, will require additional support from the Government resulting in the Group being nearly 100% owned by the Irish Government as the Government has agreed to back stop any capital shortfalls. DBRS views this support as illustrating the Government’s willingness to support its pillar banks.

The level of the ratings reflect DBRS view that the AIB’s franchise has been weakened by recent events in Ireland and by the E.C. required disposal of certain international assets, including the profitable Polish banking operations. Nonetheless, DBRS anticipates AIB’s sizeable and diversified domestic franchise, which is now being merged with the smaller Education Building Society, will ultimately emerge from the current stress which originates from the significant economic headwinds engulfing the Republic of Ireland. Pro-forma to the capital raise, AIB’s core Tier 1 capital ratio would be 21.9%, which indicates substantial resources to absorb losses.

In DBRS’s view, the difficult operating environment has significantly reduced the Group’s underlying earnings capacity through lower customer activity and a reduced balance sheet. Low levels of economic activity have reduced demand for new lending and banking products and services negatively impacting earnings generation. Given the sizable credit provisions and the reduced earnings generation as a result of the smaller franchise, DBRS sees the Group’s return to underlying profitability as being unlikely over the medium-term.

Given higher NAMA haircuts than some of its peers and the sizeable capital requirement as determined by PCAR, DBRS views AIB’s risk profile as notably weaker than previously anticipated. As such, DBRS expects credit costs to be significant over the near-term pressuring earnings. Importantly, however, the Group’s sizeable retail deposit franchise supports the Group’s overall funding profile. Like other Irish banks, AIB has limited access to market funding and is very much reliant on central banks for wholesale funding.

While DBRS has already factored in the increased risk of loss to subordinated bondholders in the ratings, DBRS sees additional risk to the subordinated debt holders, given DBRS’s view of lower systematic support across the entire Irish banking sector and increased potential for negative actions impacting senior bond holders. Accordingly, DBRS has lowered the ratings on subordinated debt by a similar number of notches and the ratings remain Under Review with Negative Implications, where they were placed on 3 December 2010.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the issuer, Minister for Finance and Central Bank of Ireland. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steve Picarillo
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 20 October 2005
Most Recent Rating Update: 15 December 2010

For additional information on this rating, please refer to the linking document below.