DBRS Upgrades PTSB’s Senior Ratings to BB; Trend Positive

DBRS Ratings Limited (DBRS) has today upgraded the Issuer Rating and non-guaranteed senior ratings of permanent tsb p.l.c. (PTSB or the Bank) to BB, from BB (low) and the Issuer Rating of Permanent TSB Group Holdings p.l.c. (the Group) to BB (low) from B (high). The Bank’s Non-Guaranteed Short-Term Debt and Non-Guaranteed Short-Term Deposits ratings were confirmed at R-4 as was the Short-Term Issuer Rating of the Group. The trend on all of the ratings is Positive, with the exception of the Group’s Short-Term Issuer Rating where the trend is Stable. The Bank’s Intrinsic Assessment (IA) was upgraded to BB and the Support Assessment was maintained at SA3. As a result, the Bank’s Issuer and Senior ratings are positioned in line with the IA.

The ratings upgrade reflects the further improvement of the Group’s core profitability and the completion of the European Commission (EC) required deleveraging without a meaningful impact on its capital ratios. The deleveraging has also led to a substantial improvement in the Bank’s funding profile and importantly the franchise is showing signs of returning to sustainable growth. In addition, impaired loans have reduced and the performance of the treated loans continues to be good. The Positive trend reflects DBRS’s expectation that the Bank’s profitability will continue to improve, in line with the improved lending volumes and higher margins. The positive economic conditions in Ireland should also support asset quality improvements although DBRS will monitor closely the update expected in 3Q17 on the Group’s NPL strategy. DBRS also expects that the operating environment in Ireland, the improved funding position and the positive lending trends should mitigate any impact on the Group from the UK leaving the European Union.

PTSB is a provider of financial services in the Republic of Ireland with total assets of EUR 23.6 billion at end-2016. DBRS views positively that in 2016 the Group completed on all of its deleveraging commitments as part of its EC approved restructuring plan including the disposal of its Non-Core UK portfolio and its loan book in the Isle of Man.

The Group’s results continued to improve in 2016 while legacy issues should now be less of a drag on profitability following the sale of the non-core portfolios. The Group reported operating profit before tax and exceptional items of EUR 188 million in 2016, up from EUR 26 million in 2015. The increase reflected growth in both net interest income (NII) and other income, as well as an impairment write-back of EUR 68 million. The result also incorporated a capital gain of EUR 29 million from the sale of the Group’s share in Visa Europe. However the disposal of the Group’s remaining UK loan portfolio, as well as the sale of the non-core loan book in the Isle of Man and some additional restructuring costs, led the Group to report a net loss for the year of EUR 226 million. The Group continues to benefit from reduced funding costs (especially customer deposits), and DBRS expects further improvement in the net interest margin (NIM) for the full year 2017 given that the Group NIM in 1Q17 was 1.80%, up further from the 4Q16 NIM of 1.59% and the full-year 2016 NIM of 1.48%.

PTSB’s asset quality remains very weak with, at end-2016, non-performing loans (NPLs, 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 5.9 billion (end-2015: EUR 6.6 billion). The reduction in 2016 was mainly a result of cures from improved arrears treatment outcomes. However, as a result of the deleveraging the NPL ratio remained extremely high at 28% of gross loans with a coverage ratio of 41%, up slightly from 40% at end-2015. Although the Bank’s asset quality is very weak DBRS notes that of the EUR 5.7 billion of NPLs in the mortgage book, 54% are “treated”. These treated NPLs include split mortgages and other treated loans, and in approximately 90% of these cases the borrower is performing to the restructured terms. DBRS notes that the Group expects to provide, in 3Q17, an update to the market on the next phase of its NPL strategy.

As a result of the deleveraging in 2016 PTSB’s funding profile has improved considerably. At end-2016, customer accounts totalled EUR 17.0 billion accounting for 80% of total funding, up from 70.5% at end-2015, and up from 37% in 2011. The impact of the deleveraging has also been positive on the loan to deposit ratio which at end-1Q17 had reduced to 110.7%, down substantially from the 125% ratio at end-2015. Importantly monetary authority funding has continued to reduce rapidly and at end-2016 this had reduced to EUR 1.4 billion. DBRS noted that in 1Q17 this fell further to EUR 0.7 billion, or 3% of total funding. At end-2016 the Net Stable Funding Ratio (NSFR) was 105%.

PTSB’s capital ratios remain satisfactory as the reduction in the Group’s risk-weighted assets (RWAs), following the sale of the non-core portfolios, mitigated the the loss connected with these transactions. At end-2016 the Group’s fully loaded Basel III Common Equity Tier 1 (CET1) ratio was 14.9%, down slightly from 15.0% at end-2015, and the ratio was 15.1% at end-1Q17. On a leverage ratio basis, the Group also demonstrated further improvement as a result of the deleveraging. At end-2016 the fully loaded leverage ratio was 6.8%, up from 5.9% at end-2015, and the transitional leverage ratio was 7.8%, up from 6.7% at end-2015.

RATING DRIVERS
Further track record in improving core profitability and evidence that asset quality metrics will continue to improve, without significantly impacting capital, could have positive rating implications. Given the positive trend, downward pressure is unlikely in the medium term, however an inability to continue the recent improvements in core profitability and asset quality could have negative rating implications. Evidence that the recent increase in new lending volumes are slowing would also be viewed negatively.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 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), and Guarantees and Other Forms of Support (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 and company disclosures. DBRS considers the information available to it for the purposes of providing this rating to be 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 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: Elisabeth Rudman, Managing Director, Head of EU FIG, Global Financial Institutions Group
Initial Rating Date: October 27, 2009
Most Recent Rating Update: June 14, 2016

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