DBRS Confirms Allied Irish Banks at BBB (low), Trend Changed to Positive on LT Ratings

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 Non-Guaranteed Long-Term Deposit ratings. The Bank’s R-2 (middle) Non-Guaranteed Short-Term Debt and Deposits ratings, the BBB (high) long-term Critical Obligations Rating (COR), and the R-1 (low) short-term COR were all also confirmed. The trend on all of the ratings, with the exception of the ST COR has been changed to Positive from Stable. The trend on the ST COR remains Stable. The Bank’s intrinsic assessment (IA) was maintained at BBB (low) and the Support Assessment at SA3. The Bank’s Irish Government guaranteed long-term deposit rating was also confirmed at A (high), with a Stable trend, reflecting DBRS’s rating on the Republic of Ireland.

The change in the trend to Positive reflects the continued improvement made by the Bank in terms of profitability and asset quality, as well as the recent capital restructuring, and our expectation that these trends will continue over the next year. Further evidence of the improved core profitability and a continuation of the improvement in asset quality could have positive rating implications, while a substantial deterioration in profitability or a deterioration in the Bank’s risk profile could have negative implications.

AIB is one of the two predominant banking groups operating in Ireland, and it offers a wide range of retail, commercial and corporate banking services within Ireland. AIB also provides retail and commercial banking services in Great Britain and Northern Ireland. DBRS considers AIB’s established domestic franchise to be a key factor underpinning the Bank’s intrinsic assessment. AIB received significant capital injections from the Irish Government between 2009 and 2011, which resulted in the Government owning over 99% of the Bank’s ordinary share capital. Following the capital reorganisation process undertaken in December 2015, the Irish Government now holds 99.9% of the Bank’s ordinary share capital.

AIB’s profitability strengthened further in 2015, driven by the improvement in the macroeconomic environment in Ireland and the Bank’s success in rebuilding its earnings power and working out problematic loans. Statutory profit for the year reached EUR 1.38 billion, significantly higher than the EUR 915 million profit recorded in 2014 and the sizeable loss of EUR 1,597 million in 2013. Although the strong bottom line profitability reflected both increased net interest income and reduced operating expenses, it was mainly driven by a EUR 925 million provision write-back, compared to a write-back of EUR 185 million in 2014 and an impairment charge of EUR 1,916 million in 2013. Operating expenses, excluding exceptional items and regulatory levies, were reduced 8% to EUR 1,296 million, as a result of further staff reductions and tight cost control. DBRS notes positively that since 2012, when the structured cost reduction programme started, the Group has cut operating expenses by 26% and that the cost reduction targets were reached during 2015. The Bank’s reported cost/income ratio for 2015 was 49%, down from 55% in 2014. DBRS notes, however, that the reported figure does not incorporate the bank levy and restitution and restructuring expenses that combined are a sizeable EUR 314 million. The EUR 925 million write-back reflected the improvement in the overall economic environment and the Bank’s progress on debt restructuring, with residential mortgages accounting for over 51% of the reversal. DBRS acknowledges that the write-backs strengthen bottom line profitability but does not see it as core income.

AIB’s asset quality improved further in 2015, and at end-2015 total impaired loans were EUR 13.1 billion, significantly lower than EUR 22.2 billion at end-2014 and EUR 28.9 billion at end-2013. However, as a result of provision write-offs and the impact of the write-back, the coverage ratio decreased to 47% at end-2015 from 51% at end-2014. DBRS would expect the Bank’s asset quality to continue to improve as economic conditions improve in Ireland and the ongoing restructuring of problem loans continues.

AIB’s funding profile continues to be a strength with the substantial deleveraging in recent years and the stable deposit base that is reflected in a loan-to-deposit ratio of 101% at end-2015. Monetary authority funding has also been reduced further. At end-2015, it accounted for EUR 2.9 billion, including a TLTRO transaction of EUR 1.9 billion. Liquidity remains conservatively managed. At end-2015, the Group had an available liquidity pool of EUR 16 billion, of which EUR 14.9 billion was ECB eligible. At end-2015, according to the EU Delegated Act, the Liquidity Coverage Ratio was approximately 116%, while the Net Stable Funding Ratio was estimated at 111%.

Following discussions with the Irish Government, AIB completed a reorganisation of its capital structure in December 2015. The major elements of this included: (i) the conversion and redemption of the EUR 3.5 billion 2009 Preference Shares (2009 Prefs) injected by the government in 2009 (this led to a EUR 1.8 billion increase in the Bank’s ordinary share capital); (ii) a consolidation of the ordinary shares; (iii) the redemption of the EBS promissory note, which was issued by the Minister for Finance in 2010, at its EUR 225 million carrying value; and (iv) the issuance of specific capital instruments in November 2015 by AIB, including EUR 750 million of subordinated Tier 2 notes and EUR 500 million of Additional Tier 1 (AT1) securities. DBRS views the capital restructuring positively, as it has normalised the capital structure of the Bank. This is expected to allow the Government, in time, to begin to sell down its stake. In addition, it has, together with the improved financial performance, led to a substantial improvement in AIB’s capital ratios. At end-2015, AIB’s fully-loaded common equity tier 1 (CET1) ratio had increased to 13.0%, up from 5.9% (excluding the 2009 Preference Shares) at end-2014. On a transitional basis, at end-2015, the CET1 ratio was 15.9%, and the total capital ratio was 18.9%. AIB’s leverage ratio has also improved markedly and at end-2015, the fully-loaded CRDIV leverage ratio was 7.9%.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents, the NTMA, the Central Bank of Ireland and 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: September 29, 2015

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor
London,
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.