DBRS Confirms PTSB at BB (low), Trend Changed to Positive on LT Ratings

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 Deposits ratings. The Group’s Non-Guaranteed Short-Term Debt and Non-Guaranteed Short-Term Deposits ratings were confirmed at R-4. The trend on the long-term ratings has been revised to Positive from Stable while the trend on the short-term ratings remains Stable. The Group’s Intrinsic Assessment (IA) was maintained at BB (low) and the Support Assessment at SA3. PTSB’s Irish Government guaranteed long-term deposit rating was also confirmed at A (high), with a Stable trend, reflecting DBRS’s rating of the Republic of Ireland.

The change in the trend to Positive reflects the progress the Group has made in deleveraging its Non-Core portfolio as well as in improving its underlying profitability, its asset quality metrics and its capitalisation levels. Furthermore, it incorporates DBRS’ expectation that these trends will continue in the forthcoming months. The successful disposal of the remaining GBP 2.4 billion Non-Core UK portfolio along with a continuation in core profitability and asset quality trends could have positive rating implications while a significant delay on the deleveraging of the residual UK portfolio or a reversal on profitability and asset quality trends could result in the trend being revised to Stable.

PTSB is a provider of financial services in the Republic of Ireland with total assets of EUR 29.3 billion at end-2015. The Group is mainly focused on retail personal and retail SME banking and serves its circa 1.1 million customers through a network of 77 branches across the Republic of Ireland and various digital channels, including mobile, telephone and online banking. The Group’s results have shown signs of improvement over recent periods, however, challenges remain as legacy issues continue to be a drag on profitability. On an underlying basis, the Group reported an operating profit before exceptional items in 2015 of EUR 26 million, a substantial improvement on the loss of EUR 39 million in 2014. The positive result was driven by higher net interest income, reduced ELG (Eligible Liabilities Guarantees) fees and lower operating expenses. Nonetheless, as a result of the EUR 401 million loss on the sale of Non-Core portfolios and the EUR 52 million loss on the repurchase of the Contingent Capital Note (CCN) the Group reported a statutory loss of EUR 425 million in 2015 (2014: a loss of EUR 102 million). Net interest income was up 8.8% year-on-year helped by an increased net interest margin (NIM), which for the full year 2015 reached 1.12%, with the improvement in NIM primarily reflecting reduced funding costs. Given that 4Q15 NIM was 1.30% and PTSB has affirmed its medium term target NIM of 1.70% DBRS expects to see further improvement in the NIM.

PTSB’s asset quality has been improving as a result of the deleveraging of the Irish Non-Core portfolio, the improvement in the domestic economic environment, as well as the Group’s progress in dealing with problem loans. Nonetheless, asset quality remains extremely weak with, at end-2015, non-performing loans (defined as impaired loans, loans which are greater than 90 days in arrears, loans where the borrower is considered unlikely to repay the total loan balance without realisation of the underlying collateral and loans which are considered unlikely to pay as defined under regulatory guidelines) of EUR 6.1 billion, down from EUR 8.3 billion at end-2014 and EUR 9.1 billion at end-2013. However, as a result of the deleveraging the coverage ratio reduced marginally to 44% from 45% in 2014.

PTSB’s funding profile continues to improve, primarily as a result of the deleveraging. In 2015 customer accounts reduced by 9.2% on end-2014, due mainly to a reduction in institutional deposits and repos with the National Treasury Management Agency as the Group improves its costs of funds. However, as a result of the deleveraging at end-2015 customer deposits accounted for 65% of the total funding base, up from 56% at end-2014, and the loan-to-deposit ratio improved to 125% at end-2015, well within the 2018 target of below 130%. The Group reduced its liquidity buffer levels to EUR 3.8 billion at end-2015, from EUR 5.3 billion at end-2014, primarily as a result of NAMA bond redemptions and an increase in asset encumbrance, however at end-2015 nearly 61% of the liquidity buffer consisted of High Quality Liquid Assets (HQLA), above the 2015 transitional regulatory minimum of 60%. PTSB reported a Liquidity Coverage Ratio (LCR) of 153% at end-2015 while the Net Stable Funding Ratio (NSFR) stood at 94% as of the same date.

PTSB’s capitalisation improved substantially in 2015. At end-2015 the Group’s fully loaded Basel III Common Equity Tier 1 (CET1) ratio was 15.0%, up from 12.4% at end-2014, mainly as a result of the Group’s successful capital transactions in April 2015. At end-2015 the Group’s transitional CET1 ratio was 17.1% and this compares to a minimum requirement of 11.45% as per the Single Supervisory Mechanism following the Group’s Supervisory Review and Evaluation Process (SREP). DBRS notes that at end-1Q16 the fully-loaded CET1 ratio was 15.4% while the transitional CET1 ratio stood at 17.3%, with the increase primarily driven by the profitable performance in the quarter. DBRS notes that the expected sale of the remaining UK portfolio will result in a reduction in the CET1 ratio levels, however, DBRS expects the Group’s capital ratios to remain well above regulatory requirements.

RATING DRIVERS
Further improvement in core profitability and in asset quality metrics along with the successful disposal of the remaining Non-Core UK business portfolio could have positive rating implications.

Given the change in the trend to Positive, negative rating pressure is unlikely. However, a significant delay in the disposal of the Non-Core UK business portfolio along with a notable deterioration in core profitability and a deterioration in the performance of the loan book could result in the trend being revised to Stable.

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) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (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 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: Elisabeth Rudman
Initial Rating Date: October 27, 2009
Most Recent Rating Update: September 29, 2015

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