DBRS Confirms Allied Irish Banks at BBB (low), Trend Changed to Stable, IA revised up to BB (high)

DBRS Ratings Limited (DBRS) has today confirmed the non-guaranteed senior ratings of Allied Irish Banks p.l.c. (AIB, the Bank or the Group), including its BBB (low) Non-Guaranteed Long-Term Debt and Deposit ratings. The Bank’s Non-Guaranteed Short-Term Debt and Deposits ratings were upgraded to R-2 (middle) from R-2 (low). The trend on all non-guaranteed ratings was revised to Stable from Negative. The Bank’s intrinsic assessment (IA) was changed to BB (high) from BB. DBRS maintains a Support Assessment of SA-2 for AIB, as a result the ratings incorporate one notch of uplift from the IA for systemic support. The Bank’s Irish Government guaranteed long-term debt ratings are also confirmed at A, with a Stable trend, reflecting DBRS’s rating of the Republic of Ireland.

The improvement in AIB’s IA to BB (high) reflects the Bank’s continued progress, most recently highlighted by the return to profitability in 2014, and the improvement in the Bank’s asset quality, although impaired loans remain at elevated levels. In addition, DBRS notes AIB’s improved liquidity buffer and more normalised funding profile, with the reported loan-to-deposit ratio reduced to 99% at end-2014, and usage of monetary authority reduced to only 3% of funding needs. The change in the trend to Stable reflects the positive downward trajectory of AIB’s impaired loans, the return to profitability and that the Bank comfortably passed the ECB’s Comprehensive Assessment on both a static and dynamic balance sheet approach. As a result of the confirmation of the Bank’s non-guaranteed senior ratings, and the improvement of the IA, AIB’s long-term debt and deposit ratings now incorporate only one notch of uplift from the IA reflecting potential systemic support. This reflects the improvements of AIB’s fundamentals, and its gradual progression to a more normalised state, therefore reducing the necessity for potential further systemic support. The upgrade of the Bank’s short-term ratings to R-2 (middle) principally reflects these improvements in AIB’s funding and liquidity profile.

Further upward movement in the IA would require the Bank to evidence that it is now sustainably profitable, as well as achieve further progress in asset quality metrics. An inability to deliver a consistent level of profitability would be viewed negatively by DBRS, as would any indication that the current positive downward trajectory of impaired loans were to reverse. The inability to reach an agreement with the Irish government to restructure the Bank’s capital, including the EUR 3.5 billion of 2009 Preference Shares (2009 Prefs) could also negatively pressure the rating. The ratings on the Government Guaranteed debt are directly linked to DBRS’s rating of the Republic of Ireland and as such, any changes in this rating would be reflected in the rating of the guaranteed debt.

AIB reported a net profit of EUR 915 million in 2014, marking the first full year of profit since 2008. Although supported by several one-offs, the return to profitability was also helped by a substantial improvement in the Bank’s Net Interest Margin (excluding the cost of the Eligible Liabilities Guarantee Scheme (ELG)) to 1.69%, and continued control of the cost base. In addition to the improved underlying performance, AIB’s results benefited from a EUR 188 million net write-back of provisions, a EUR 2.1 billion positive change compared to 2013. Whilst earnings have been supported by the net write-back of provisions, DBRS does not view this as core income. DBRS does, however, anticipate that the level of provision charges will remain at lower levels as the Irish economy continues to recover.

AIB’s asset quality remains extremely weak, with the Bank reporting an impaired loan ratio of 29.2% at end-2014. DBRS does, however, note that impaired loans appear to have peaked, and are now on a downward trajectory. Although still elevated at EUR 22.2 billion, AIB’s impaired loans are down 23% YoY and 25% from its peak at end-2012; the result of both positive momentum in the Republic of Ireland (ROI) and UK economies, and increased loan restructurings, write-offs and repayments. The performance of the Bank’s Irish loan portfolios has also shown progress, with the Irish mortgage portfolio, for example, experiencing a 43% YoY decrease in the amount of loans moving into arrears, and a 41% YoY decrease in the quantum of negative equity in the book, to EUR 2.7 billion. DBRS also positively notes that the Bank’s coverage ratio remains strong across the majority of portfolios, especially the weaker land and development lending portfolio where the the level of specific provisions taken to date, cover 75% of the impaired loans.

At end-2014, AIB had a transitional Basel III CET1 ratio of 16.4%, a 140 basis points (bps) increase from January 1, 2014, and a fully-loaded ratio of 11.8%, an increase of 130 bps. AIB also reported a fully loaded leverage ratio of 6%, an increase of 100 bps YoY reflecting the increase in tier 1 capital and a reduction in the total exposure amount. DBRS, however, notes that these ratios include the EUR 3.5 billion of preference shares (2009 Prefs), which cease to qualify as CET1 capital under Basel III from January 1, 2018. Excluding these 2009 Prefs, the pro-forma fully-loaded CET1 ratio stood at 5.9%, whilst the pro-forma leverage ratio was 3%, highlighting the need for the Bank to continue to generate solid profitability in order to further increase its capital levels. The Bank has indicated that discussions are undergoing with the Department of Finance regarding the capital structure of the Bank and DBRS expects that the 2009 prefs will be converted into further government equity. A simplification of the Government’s shareholding (currently the Bank has approximately 521 billion shares in issue, of which 500 billion were issued to the Government in 2011) is also under discussion as this would be an important step to allowing the Group to ultimately return to private ownership.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).These can be found can be found at: http://www.dbrs.com/about/methodologies

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

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Ross Abercromby
Rating Committee Chair: Roger Lister
Initial Rating Date: October 20, 2005
Most Recent Rating Update: June 16, 2014

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