DBRS Comments on permanent tsb’s 1H12 Results, Ratings Unaffected at BB (low), UR - Negative

DBRS, Inc. (DBRS) has today commented that the non-guaranteed ratings of permanent tsb, p.l.c (permanent or the Group), including its Non-Guaranteed Long-Term Deposits and Non-Guaranteed Long-Term Debt ratings of BB (low), are unaffected by permanent’s recent earnings release for the six months ending 30 June 2012 (1H12). The ratings remain Under Review with Negative Implications, where they were placed on 4 April 2011. DBRS expects to conclude the review within the next two months following a comprehensive review of the Group’s restructuring plan and its impact on the Group’s franchise, earnings ability, risk profile and funding.

DBRS views the Group’s results as reflecting the challenging operating environment in Ireland, including weak demand for new lending, intense competition for deposits, falling property values and elevated levels of unemployment. For 1H12, permanent reported an after-tax loss of EUR 566 million. These results included EUR 130 million of charges for exceptional items, including restructuring costs and a write-down of certain assets held for sale to their estimated realizable value. The primary driver of the loss was elevated credit costs reflecting the difficult operating conditions. Impairment charges on loans and receivables totaled EUR 434 million, a 30% increase YoY, but 61% lower than in 2H11. The YoY increase in credit costs primarily reflects an increased charge on commercial mortgages, while the impairment charge on Irish residential mortgages was largely unchanged. DBRS notes that, while the impairment charge on Irish residential mortgages was flat, the composition of the charge shifted. This was due to an increase in charges on the buy-to-let book, whose performance continues to be under significant stress, which was offset by lower charges on the owner occupied mortgage book. DBRS comments that the sizable loss was within DBRS’s expectations, given the operating environment in Ireland and the ongoing restructuring of the Group.

In the review, DBRS will assess the Group’s earning capacity and its ability to generate earnings sufficient to absorb losses and generate organic capital. However, given the operating environment in Ireland, DBRS recognises that restoration of this capacity may take time, as illustrated by the reduced earnings generation in 1H12. Total operating income (net interest income and net other income) was slightly higher YoY at EUR 115 million, but DBRS notes that 1H11 included a EUR 41 million loss on debt buy-backs. Excluding this loss, 1H12 results were 23% lower YoY. Net interest margin (NIM) continues to be compressed by the intense competition for deposits, as well as the Group’s lowering of the standard variable rate on mortgages and a reduction in the average level of low-cost ECB borrowings. NIM, before ELG Scheme costs, declined 16 basis points from year-end 2011 to 0.76%. Results were further impacted by a EUR 81 million charge for the cost of the government guarantee; although this was EUR 13 million lower than 1H11. Excluding exceptional items, permanent reported a pre-impairment operating loss of EUR 21 million in 1H12, as compared to an operating loss of EUR 26 million in 1H11.

Asset quality weakened during the period reflecting the challenging housing market, high unemployment and the continued pressures on household income from austerity measures. As a result, arrears cases in the Group’s Irish residential mortgage portfolio increased. Within this portfolio, cases more than 90 days in arrears increased by 15.5% and now represent 14.1% of the portfolio compared to 12.0% at year-end 2011. DBRS notes that the pace of loans in early stage arrears moderated in 1H12, evidencing that the Group’s investments in collection staff and infrastructure is having a positive impact on performance. The EUR 7.6 billion non-core U.K. residential mortgage portfolio continues to perform solidly with arrears cases slightly lower than at year-end 2011 at 3.1% of the book. Credit quality of the EUR 2.3 billion non-core commercial mortgage loan portfolio continues to be impacted by the difficult operating environment in Ireland, including falling property values, reduced rental income and higher vacancy rates. To this end, the level of impaired loans in the portfolio increased to EUR 0.9 billion or 41% of the book compared to 34% at 31 December 2011. Given the difficult labour market conditions, reduced levels of disposable income and weak property values, DBRS expects credit performance to remain challenged over the near-term and anticipates arrears cases and impaired loans to remain elevated for the remainder of 2012 and into 2013.

While permanent’s liquidity and funding profile remains challenged, DBRS sees positive indications of early progress in rebalancing the funding profile to be less reliant on wholesale funding. During 1H12, deposits increased 15% from year-end 2011 to EUR 17.3 billion. The growth in deposits reflects the acquisition of Northern Rock’s EUR 0.5 billion Irish deposit book along with competitive pricing. The expansion in the deposit base resulted in deposits comprising 44% of total funding, up from 36% at year-end 2011. Importantly, DBRS notes that permanent exited ELA funding during 1H12, while ECB related funding declined 4% in the period to EUR 11.2 billion. Regulatory capital levels remain strong, benefitting from the release of EUR 1.3 billion of capital following the sale of the Life Group to the Irish Government on 29 June 2012, offset by the loss in the period. As a result, the Group’s total capital ratio stood at 21.5% at 30 June 2012, up from 17.9% at year-end 2011, and well in excess of the Central Bank of Ireland’s minimum target of 10.5%. The Group’s Core Tier 1 ratio was 18.1%.

Notes:
All figures are in Euros unless otherwise noted.

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

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This commentary was disclosed to the issuer and no amendments were made following that disclosure.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: 27 October 2009
Most Recent Rating Update: 9 August 2012

For additional information on this rating, please refer to the linking document under Related Research.