DBRS: Bank of Ireland Continues To Improve Capital and Asset Quality in 3Q14

Summary:
• Total defaulted loans have now reduced by EUR 1.9 billion to EUR 16.4 billion at end-3Q14 from end-2Q13
• Capital ratios continued to improve with the transitional Basel III common equity tier 1 (CET1) ratio improving by 90 basis points (bps) in 3Q14 to 14.1%
• Comfortably passed the ECB’s Comprehensive Assessment
• DBRS rates Bank of Ireland at BBB (high), with a Negative trend, for Non-Guaranteed Long-Term Debt & Deposits.

DBRS Ratings Limited (DBRS) views the performance of Bank of Ireland (BoI or the Bank) in 3Q14 as continuing to provide evidence of the Bank’s progress, boosted by the improving economic environment in its key markets of Ireland and the United Kingdom. At end-3Q14 the level of total defaulted loans (defined as impaired loans plus residential mortgages greater than 90 days in arrears) was EUR 16.4 billion, down by EUR 1.9 billion from end-2Q13, including the negative impact of currency impacts related to the UK portfolios. Importantly DBRS notes that arrears in the Irish owner occupied and buy-to-let mortgage books continued to reduce. Although overall asset quality remains weak DBRS is of the view that the more positive economic environment, and the Bank’s Mortgage Arrears Resolution Strategy (MARS), will lead to further improvements in the Bank’s asset quality in the short-to medium term.

The Bank’s capital ratios continued to increase in 3Q14 reflecting retained profits, a more efficient capital structure in the life assurance subsidiary (with the benefit being approximately 25 bps), and a modest reduction in risk weighted assets. As a result the transitional Basel III common equity tier 1 (CET1) ratio improved by 90 basis points (bps) in 3Q14 to 14.1%, and the fully-loaded ratio was 11%, an increase of 100 bps on end-2Q14. DBRS notes that this ratio includes the EUR 1.3 billion of remaining 2009 Preference Stock and excluding these instruments (which the Bank aims to do by July 2016), the pro-forma fully-loaded CET1 ratio was 8.3% at end-3Q14, up 200 bps on end-2013. This highlights the need for the Bank to continue to improve its profitability in order to enable capital growth through earnings retention.

DBRS also notes that the Bank comfortably passed the ECB’s Comprehensive Assessment with the transitional CET1 ratio being, at its lowest point in the 2014-2016 time period, 12.4% in the baseline scenario and 9.3% in the adverse scenario.

The Bank’s net interest margin (NIM) was approximately 2.08% in 3Q14 with the slight improvement on the 2.05% in 1H14 reflecting lower funding costs and higher margins on increased new lending, while fees and other income remained in line with 1H14.

DBRS rates Bank of Ireland at BBB (high) with a Negative trend for Non-Guaranteed Long-Term Debt & Deposits.

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