DBRS Confirms Permanent TSB at BB (low), Trend Changed to Positive, IA to B (high)

DBRS Ratings Limited (DBRS) has today confirmed the non-guaranteed senior ratings of permanent tsb p.l.c. (PTSB or the Group), including its BB (low) Non-Guaranteed Long-Term Debt and Non-Guaranteed Long-Term Deposit Ratings. The trend on the non-guaranteed long-term ratings was revised to Positive from Negative, whilst the trend on the non-guaranteed short-term ratings was revised to Stable from Negative. The Bank’s intrinsic assessment (IA) was also revised to B (high) from B. DBRS maintains a Support Assessment of SA-2 for PTSB, 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.

In revising the trend of the ratings to Positive, and the IA upwards to B (high) from B, DBRS recognises the ongoing progress PSTB has made in restructuring the Group, deleveraging its non-core assets, and improving its funding profile. In addition, DBRS notes the completion of the EUR 525 million capital raise. This not only allowed the Group to address the capital shortfall identified under the adverse scenario of the ECB’s Comprehensive Assessment in October 2014, but will also enable the Group to strengthen the quality of its capital by allowing it to repurchase the EUR 400 million of State-owned Contingent Capital Notes (CCN), due for redemption in 2016. As a result of the confirmation of the Bank’s non-guaranteed senior ratings, and the improvement of the IA, PTSB’s final ratings now incorporates only one, as opposed to two, notches of uplift from systemic support. This reflects the improvements of PTSB’s fundamentals, and its gradual progression to a more normalised state, therefore reducing the necessity of potential further systemic support.

Further upward movement in the IA would require further progress in restoring sustainable profitability, especially in the Core Bank, whilst also continuing to improve its asset quality metrics and executing its restructuring plan. The inability to continue the trend towards returning to profitability would be viewed negatively by DBRS, as would any reversal of the current positive downward trajectory of impaired loans. Any failure to execute the restructuring plan in line with stated targets 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.

In April 2015, PTSB received formal approval of its Restructuring Plan from the European Commission, and DBRS views positively the Group’s already substantial progress in implementing the Plan’s required actions. These actions include the raising of EUR 525 million of capital, which was achieved in April 2015, and the disposal of the Capital Homes Loans Limited (CHL) Mortgage Book and the Group’s non-performing Irish Commercial Real Estate (CRE) lending, which was partially achieved in March 2015. In March 2015, PTSB agreed the sale of EUR 3.5 billion (approximately half) of the CHL Mortgage Book, together with the CHL loan servicing platform, and EUR 1.5 billion (approximately 90%) of the Irish CRE portfolio. DBRS expects the remaining portions of the two portfolios to be disposed within the next 12 months, in line with the Restructuring Plan.

As the major elements of the Restructuring Plan are implemented, and specifically the deleveraging of the non-core assets, DBRS expects the Group to closely resemble the Core Bank, which operates as a focused domestic retail bank. Although the Group remains loss-making, with a pre-tax loss of EUR 48 million in 2014, DBRS positively notes that the Core Bank returned to profit, with a pre-tax profit of EUR 5 million in 2014. This was an improvement of EUR 699 million compared to the loss recorded in 2013, and principally reflected a 16% YoY increase in net interest income growth and reduced costs from the Eligible Liabilities Guarantee Scheme (ELG) that expired in March 2013. In addition to the improved underlying performance, PTSB’s Core Bank benefited from a EUR 51 million net write-back of provisions, a EUR 976 million positive change compared to 2013. Whilst earnings have been supported by the net write-back of provisions, DBRS acknowledges that this may be a one-off benefit and therefore is not viewed as core income. DBRS does, nevertheless, anticipate that the level of provision charges will remain at lower levels as the Irish economy continues to recover.

PTSB continues to strengthen its funding profile, with the Group’s loan-to-deposit (LTD) ratio down to 134% at end-1Q15, following strong deposit growth and further loan book deleveraging. Although the Group’s LTD ratio remains relatively high, DBRS notes that it is down from a peak of 227% at end-2011. The Group’s use of monetary authority funding has also reduced, to EUR 4.5 billion at end-1Q15 from a peak of EUR 19.5 billion in July 2011.

PTSB’s asset quality remains extremely weak, with the Group reporting a non-performing loans (NPLs) ratio of 26% at end-2014. DBRS does, however, note that NPLs appear to have peaked, and are now on a downward trajectory. This reflects not only the continued deleveraging of non-core portfolios, but also the progress of the Asset Management Unit (AMU) in dealing with arrears cases, along with the positive momentum in both the Republic of Ireland (ROI) and UK economies. PTSB’s NPLs reduced further in 1Q15, following the agreed sale of half of the CHL Mortgage Book and majority of the non-performing Irish CRE portfolio in March 2015.

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 company reports and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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 27, 2009
Most Recent Rating Update: October 28, 2014

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