DBRS Comments on Allied Irish Banks p.l.c.’s Full Year 2012 Results, Unaffected at BBB (low); Neg.

DBRS, Inc. (DBRS) has today commented that the ratings of Allied Irish Banks p.l.c. (AIB or the Group), including its Issuer Rating of BBB (low) are unchanged following the Group’s release of full year 2012 results. The ratings of the Group’s Long-Term Debt and Deposits Guaranteed by the Irish Government remain at A (low). The trend on all long-term ratings is Negative. For 2012, AIB reported an attributable loss of EUR 3.6 billion compared to a loss of EUR 2.3 billion in 2011. However, excluding exceptional items, which include loss on disposal of loans, gain on liability management exercises, restructuring expenses, gains/losses on transfer of assets to NAMA, retirement benefit curtailments, and other items, AIB generated an underlying operating loss before tax of EUR 2.8 billion in 2012 compared to EUR 8.1 billion in 2011.

From DBRS’s perspective, AIB’s results reflect the challenging conditions in the Irish economy with limited domestic economic activity, household disposable income pressured and property markets still fragile. Nonetheless, in the results, DBRS sees signs of progress towards the restructuring of the Group, transformation of the funding profile and indications that the overall strength of the domestic franchise remains intact. DBRS notes the reduced, but still sizeable loss, was within DBRS’s expectations.

Excluding exceptional items, underlying operating income was 20% lower year-on-year (YoY) at EUR 1.4 billion. Revenues were lower on reduced banking fees and commissions due to reduced customer activity while net interest income decreased 18% to EUR 1.1 billion. Net interest income declined reflecting a 7% reduction in average interest earnings assets, margin compression and the cost of the ELG Scheme. Net interest margin (NIM) was pressured by lower asset yields and marginally higher cost of funding. NIM, excluding ELG Scheme costs, declined 18 basis points to 1.22%. DBRS expects that actions taken by the Group to rebuild NIM such as the repricing of deposits and loan products will begin to bear fruit in 1H13, but that tepid demand for new lending will continue to constrain growth of interest earning asset balances thereby limiting revenue growth in the near-term.

Credit costs were 69% lower YoY, but remain elevated with impairments on loans and receivables totalling EUR 2.4 billion. Despite signs of stabilisation in the Irish economy and in house values, particularly in urban areas, the credit performance of the Irish residential mortgage portfolio continues to be challenged. Within the EUR 39.5 billion Irish residential mortgage book, loans more than 90-days in arrears stood at 20.6% from 15.5% at year-end 2011. Provision coverage was strengthened to 33.0% of impaired loans compared to 27.7% a year ago. Further, the weak economic conditions in the Irish economy continue to pressure those businesses reliant on the domestic economy and their ability to service their debt. As a result, the performance of the Group’s EUR 15.2 billion SME/commercial lending book continues to be challenged. Impaired loans in the SME portfolio increased 15% to EUR 5.2 billion representing 34% of the portfolio. Provision coverage stood at 62% of impaired loans. DBRS sees arresting the trajectory in the performance of these loan books as key challenges for the Group in 2013.

In 2012, AIB made further progress in strengthening the balance sheet. Deleveraging of the balance sheet was further advanced resulting in lower wholesale funding requirements and reduced risk on the balance sheet. As of year-end 2012, including contracted sales, AIB had achieved 89% of the year-end 2013 deleveraging target of EUR 20.5 billion as set out in PCAR 2011. The deposit base grew EUR 2.9 billion in 2012 to EUR 64 billion despite the closure of AIB’s operation in Isle of Man and Channel Islands. Excluding the closure of these operations, AIB’s deposit base was 8% higher YoY. DBRS notes that the growth in deposits was achieved despite the Group’s focus on reducing their price. As a result of increasing deposits and deleveraging actions, AIB’s loans-to-deposit (LTD) ratio, including loans held for sale, improved to 115% from 138% at year-end 2011. Importantly, AIB re-accessed wholesale funding markets as market sentiment towards Ireland improved, completing a GBP 395 million U.K. RMBS transaction in 2012, as well as accessing the covered bond markets in November 2012 and January 2013 for EUR 500 million each issuance. Notably, Central Bank related funding was reduced by EUR 9 billion in 2012 to EUR 22 billion. While DBRS recognises the progress achieved in rebalancing the funding profile and re-accessing the private funding markets, DBRS sees the transformation of the funding profile and the full withdrawal from central bank funding as a longer-term process.

Regarding capital, AIB reported a core tier 1 ratio of 15.1% at year-end 2012 compared to 17.9% a year ago, well-in excess of regulatory requirements of 10.5%. The reduction in core Tier 1 capital was primarily due to the attributable loss for the period partially offset by lower risk-weighted assets (RWAs). Deleveraging actions, loan repayments, and increased provisioning were the main drivers of a EUR 12.9 billion reduction in RWAs to EUR 71.4 billion.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]