DBRS Upgrades AIB to BBB (high); Trend now Stable on LT Ratings

DBRS Ratings Limited (DBRS) has today upgraded the ratings of Allied Irish Banks p.l.c. (AIB or the Bank), including its Long-Term Issuer Rating, Long-Term Senior Debt rating and Long-Term Deposits rating to BBB (high), from BBB. The Bank’s Short-Term Debt and Short-Term Deposits ratings were also upgraded at R-1 (low). The Bank’s intrinsic assessment (IA) was upgraded to BBB (high) and the Support Assessment maintained at SA3. AIB’s Long-Term Critical Obligations Rating (COR) was upgraded to A from A (low), the Short-Term COR remains at R-1 (low). The trend on all ratings is Stable. For a complete list of ratings, please see the table at the end of this press release.

KEY RATING CONSIDERATIONS
The upgrade of the long-term ratings reflects the further improvement made by the Bank in terms of reducing impaired loans. The solid funding profile and improved capital, together with improvements in core profitability, have contributed to a much-improved financial profile.

The trend on the Bank’s ratings is Stable. This takes into account that, although DBRS considers the Bank could face potential earnings pressure in the event of a hard Brexit scenario, the improved capital and funding position of the Bank provide a good level of mitigation.

RATING DRIVERS
Upward rating pressure would require further improvements in asset quality indicators, together with a track record of stable, risk-adjusted earnings.

A deterioration in core profitability or an increase in the Bank’s risk profile could have negative rating implications. A deterioration in the Irish economy that substantially impacted the Bank’s financial fundamentals, potentially as a result of the UK leaving the EU, could also be negative.

RATING RATIONALE
Allied Irish Banks p.l.c. (AIB) is the principal operating company (OpCo) within the AIB Group. AIB’s ratings are underpinned by the Bank’s leading franchise in Ireland. The Bank offers a wide variety of products in personal, business and corporate banking and 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.

AIB reported resilient performance in 2017 with profit before exceptional items of EUR 1,574 million in 2017, up from EUR 1,475 million in 2016. The Bank recorded a significant total provision write-back in 2017 for the fourth straight year, totalling EUR 121 million. Statutory net income for 2017 was EUR 1,114 million.

AIB’s asset quality continued to improve in 2017 with reductions in impaired loans across all sectors, mainly driven by the Bank’s progress in restructuring problem loans, and the continued positive momentum in the macroeconomic environment. At end-2017 impaired loans reduced to EUR 6.3 billion, down from EUR 9.1 billion at end-2016 and as a result the impaired loans ratio improved further to 10% (2016: 14%). AIB also completed a sale of distressed loan portfolios of EUR 0.7 billion in 2017. Total coverage ratios were 43% of impaired loans, compared to 44% at end-2016.

AIB’s funding profile continues to improve and with customer deposits up by EUR 1.1 billion to EUR 64.6 billion and the marginal reduction in the loan portfolio to EUR 60.0 billion at end-2017, the loan-to-deposit ratio improved further to 93%. Liquidity management remains conservative and at end-2017 AIB had EUR 27 billion in qualifying liquid assets and contingent funding (2016: EUR 30 billion), with EUR 8 billion of it being tied due to repurchase, secured loan and other agreements (2016: EUR 12 billion).

The Bank’s fully loaded Basel III Common Equity Tier 1 (CET1) ratio increased to 17.5% at end-2017 from 15.3% at end-2016. The increase was driven by retained earnings and reduced risk-weighted assets. AIB is required to maintain a minimum CET1 ratio of 9.525% on a transitional basis from January 1, 2018 following the Supervisory Review and Evaluation Process (SREP). DBRS notes that AIB comfortably meets these requirements with a transitional CET1 ratio of 20.8% at end-2017. AIB’s leverage ratio has also continued to improve and at end-2017, the fully-loaded CRDIV leverage ratio was 10.3%.

The Grid Summary Grades for AIB are as follows: Franchise Strength – Strong/Good; Earnings Power – Good; Risk Profile – Moderate; Funding & Liquidity – Strong/Good; Capitalisation – Good.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This 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.

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 and US regulations only.

Lead Analyst: George Yiannakis, Vice President, Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: October 20, 2005
Most Recent Rating Update: July 14, 2017

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