DBRS: AIB Reports Higher CET1 Ratio and Reducing Impaired Loans in 3Q14

Summary:
• AIB’s transitional CET1 ratio improves by 40 bps in 3Q14 to 16.5%
• Total impaired loans reduce by EUR 1.7 billion in 3Q14 and now stand at EUR 24.3 billion
• Comfortably passed the ECB’s Comprehensive Assessment
• DBRS rates Allied Irish Banks at BBB (low), with a Negative trend, for Non-Guaranteed Long-Term Debt & Deposits. The Negative trend reflects the still extremely high level of impaired assets, the challenge the Bank faces to return to sustainable profitability, and the further restructuring that is still required to enable the Bank to return to public ownership.

DBRS Ratings Limited (DBRS) considers the 3Q14 Management Update of Allied Irish Banks plc (AIB or the Bank) as continuing to illustrate the significant progress that the Bank is making. As a result of the profit generated in 3Q14 (the Bank did not disclose the actual profit number), partly offset by a marginal increase in risk weighted assets, the transitional common equity tier 1 (CET1) ratio of the Bank has increased by 40 bps to 16.5%. However, DBRS notes that these ratios continue to include the EUR 3.5 billion of preference shares that will cease to qualify from 2018. Although discussions with the Department of Finance continue over the capital structure of the Bank, DBRS is of the view that it is important for AIB to continue to improve its profitability to enable it to further increase capital levels through earnings retention. DBRS also notes that the Bank comfortably passed the ECB’s Comprehensive Assessment on both a static and dynamic balance sheet approach. Using a static balance sheet the transitional CET1 ratio was, at its lowest point in the 2014-2016 time period, 12.4% in the baseline scenario and 6.9% in the adverse scenario, while under the dynamic approach the low point for the transitional CET1 ratio was 14.3% in the baseline scenario and 10.3% in the adverse scenario.

The Bank has continued to make progress in reducing its level of impaired loans and at end-3Q14 total impaired loans were EUR 24.3 billion, down from EUR 26 billion at end-1H14 and from EUR 28.9 billion at end-2013. The improvement is primarily driven by the loan restructuring activity, but it also reflects that the level of new impaired loans is reducing. Importantly the level of impaired loans is improving, or is stable, in all loan sectors and in the Irish residential mortgage book the total number of accounts in arrears has reduced year-to-date by 11%. Although overall asset quality remains extremely 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 asset quality in the short-to medium term.

The Bank was profitable in 3Q14 and DBRS notes that the net interest margin (NIM), excluding the costs of the eligible liabilities guarantee, improved to 1.64% for the year to end-3Q14, from 1.60% up to end-1H14. Importantly the Bank is on track to meet its EUR 350 million operating cost reduction for 2014, compared to 2012, although DBRS notes that this excludes the EUR 60.5 million bank levy that was paid to the Irish State in October 2014.

DBRS rates Allied Irish Banks at BBB (low), with a Negative trend, for Non-Guaranteed Long-Term Debt & Deposits. The Negative trend reflects the extremely high level of impaired assets, and the challenge the Bank faces to return to sustainable profitability. In addition it also incorporates the further restructuring that is still required to enable the Bank to return to public ownership.

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