DBRS Upgrades AIB to BBB; Trend Positive on LT Ratings

DBRS Ratings Limited (DBRS) has today upgraded the non-guaranteed senior ratings of Allied Irish Banks p.l.c. (AIB or the Bank), including its Issuer Rating, Non-Guaranteed Long-Term Debt rating and Non-Guaranteed Long-Term Deposit rating to BBB, from BBB (low). The Bank’s Non-Guaranteed Short-Term Debt and Deposits ratings have been upgraded to R-2 (high) from R-2 (middle), the long-term Critical Obligations Rating (COR) has been upgraded to A (low) from BBB (high), while the R-1 (low) short-term COR has been confirmed. The trend on all of the ratings, with the exception of the Short-term COR rating is Positive, the trend on the Short-Term COR is Stable. The Bank’s intrinsic assessment (IA) was upgraded to BBB and the Support Assessment maintained 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 upgrade of the long-term ratings reflects the further improvement made by the Bank in terms of core profitability and reducing impaired loans, which together with the comfortable funding profile and improved capital, has resulted in much improved financial fundamentals. AIB reported another resilient set of results in 2016 with operating profit before provisions (excluding the sale of the stake in Visa Europe) of EUR 1,076 million, up 13% year-on-year (YoY) while impaired loans ratio reduced across all sectors totalling EUR 9.1 billion at end-2016, down from EUR 13.1 billion at end-2015 and as a result the impaired loans ratio improved further to 14% (2015: 18.6%; 2014: 29.2%).

The Positive trend on the long-term ratings reflects DBRS’s expectation that the Bank’s asset quality will continue to improve as economic conditions remain positive in Ireland and the ongoing restructuring of problem loans continues, although as the primary restructuring period is concluding the reduction in impaired loans may slow. It also reflects the expectation that profitability will continue to be robust with the net interest margin (excluding the ELG costs) in the second half of 2016 improving to 2.42% from 2.08% in the first half. Although unlikely given the positive trend, negative pressure on the ratings would likely stem from a deterioration in core profitability or an increase in the Bank’s risk profile, or a deterioration in the Irish economy that substantially impacted the Bank’s financial fundamentals, potentially as a result of the UK leaving the EU.

AIB is a provider of financial services, predominantly in the Republic of Ireland, and, to a lesser extent, in the UK. The Bank offers a wide variety of products in personal, business and corporate banking and serves over 2.3 million personal and SME customers in Ireland where it has leading market positions in most key products and banking services. DBRS considers AIB’s established domestic franchise to be a key factor underpinning the Bank’s IA.

Although profitability was robust in 2016 the net result was boosted again another significant net provision write-back, totalling EUR 171 million. This compares to net write-backs of EUR 925 million in 2015 and EUR 185 million in 2014. DBRS acknowledges that the write-backs strengthen bottom line profitability but does not see it as core income.

AIB’s funding profile continues to improve and with the reduction in the loan portfolio to EUR 60.6 billion at end-2016, the loan-to-deposit ratio improved further to 95%. Liquidity management remains conservative and at end-2016 the Bank’s Liquidity Coverage Ratio was 128% (2016: 116%). The Net Stable Funding Ratio was estimated at 119% (2016: 111%).

The Bank’s fully loaded Basel III Common Equity Tier 1 (CET1) ratio increased to 15.3% at end-2016, from 13.0% at end-2015, driven by retained earnings and reduced RWAs. AIB is required to maintain a minimum CET1 ratio of 9% and a minimum 12.5% total capital ratio on a transitional basis from January 1, 2017 following the Supervisory Review and Evaluation Process (SREP) by the Single Supervisory Mechanism (SSM). DBRS notes that AIB comfortably meets these requirements with a transitional CET1 ratio of 19% and a total capital ratio of 21.7%. AIB’s leverage ratio has also improved markedly and at end-2016, the fully-loaded CRDIV leverage ratio was 9.2%.

Reflecting the substantial progress that the Bank has made AIB announced in March 2017, that subject to shareholder approval, it plans to pay an ordinary dividend of EUR 250 million in respect of the 2016 profit. Additionally, following the reorganisation of its capital structure in December 2015 (see DBRS’s Rating Report published on May 3 2016 for more details) which normalised the capital structure of the Bank, and the continued progress of the Bank throughout 2016, the Irish Government appointed Bank of America Merrill Lynch, Davy and Deutsche Bank as 'Global Coordinators' to assist in a potential future Initial Public Offering (IPO) of AIB. Although there is no fixed timetable for an IPO, DBRS would view a sale of part of AIB as an important step in normalising the ownership structure.

DBRS also notes that AIB has been notified by the Single Resolution Board (SRB) that the Bank has been advised that the preferred resolution strategy for the Bank consists of a single point of entry bail-in strategy through a group holding company. DBRS will continue to monitor this process although it does not expect it to have a significant impact on the Bank.

RATING DRIVERS

Further evidence of continued core profitability and further improvement in asset quality trends could have positive rating implications. A deterioration in core profitability or an increase in the Bank’s risk profile could have negative implications. A deterioration in the Irish economies that substantially impacted the Bank’s financial fundamentals, potentially as a result of the UK leaving the EU, could also be negative.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2017), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), Guarantees and Other Forms of Support (February 2017) and Critical Obligations Rating Criteria (February 2017). 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, company disclosures and the Central Bank of Ireland. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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 historical default rates published by the European Securities and Markets Authority (“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, Senior Vice President, Global Financial Institutions Group
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings
Initial Rating Date: October 20, 2005
Most Recent Rating Update: March 2, 2017

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