DBRS Morningstar Upgrades Permanent TSB’s Long-Term Issuer Rating to BBB (low), Stable Trend

DBRS Ratings Limited (DBRS Morningstar) upgraded the Long-Term Issuer Rating of Permanent tsb p.l.c (the Bank) to BBB (low) from BB (high), and the Long-Term Issuer Rating of Permanent TSB Group Holdings p.l.c (PTSBG or the Group), the top-level holding company, to BB (high) from BB. Concurrently, the Bank’s Short-Term Issuer Rating was upgraded to R-2 (middle) from R-3, and PTSBG’s Short-Term Issuer Rating was upgraded to R-3 from R-4. All of the ratings have now a Stable trend. The Bank’s Intrinsic Assessment (IA) was raised to BBB (low) from BB (high) and the Support Assessment remains at SA1. The Group’s Support Assessment is SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS
The rating action primarily reflects the Group’s further reduction of its non-performing loans (NPLs). It also incorporates the Group’s recent issuance of its inaugural MREL eligible holding company senior debt in October 2019 evidencing the Group’s improved market access. DBRS Morningstar expects that, with significant lower NPLs and an improved capital position following the NPL sales, the Group should be in an improved position to grow lending and strengthen profitability. The ratings continue to reflect the sound funding, liquidity and capital position, which has been further strengthened with the significant reduction in NPLs.

PTSBG’s ratings are positioned one notch below the Bank’s IA reflecting the structural subordination of the holding company.

RATING DRIVERS
Positive pressure on the ratings would require a longer track record of revenue generation and an improvement in efficiency, along with continued reduction of non-performing loans.
Negative pressure on the ratings could arise from a material weakening of the bank’s asset quality, or if the Irish economy were to deteriorate such that the Group’s fundamentals were substantially impacted, potentially as a result of the UK leaving the EU.

RATING RATIONALE
A key consideration for the rating upgrade is the significant reduction of NPLs in the last 18 months. Total NPLs totaled EUR 1.7 billion at end-1H19, a material reduction from EUR 5.3 billion at end-2017. The reduction was the result of a EUR 2.1 billion sale of NPLs to Lone Star and a EUR 1.3 billion securitisation of treated NPLs in 2018. In September 2019, the Group agreed to sell a further EUR 506 million of NPLs to Lone Star. After this transaction (Glas Tranche II), gross NPLs are expected to reduce to around EUR 1.2 billion and the pro-forma NPL ratio is expected to decline to 7%, a significant improvement from the 25.6% NPL ratio at end-2017.

DBRS Morningstar views PTSBG as taking steps to improve its core profitability although this still remains a key challenge. In 1H19, PTSB reported net income of EUR 21 million, down 63% Year-on-Year (YoY), largely as a result of one-off restructuring costs and lower net interest income (NII). In 2018, net income was EUR 3 million, significantly reduced from EUR 40 million in 2017, although this was largely driven by a EUR 66 million impairment associated to the sale of NPLs. DBRS Morningstar also notes that NII was pressured by the significant reduction of NPLs, as the Bank was receiving some interest payments on these loans, albeit not on the original terms. However, the Group has been able to increase lending volumes since 2017 and NII from performing loans increased to EUR 189 million in 1H19 (1H18: EUR 184 million). The Group is also working towards boosting commission income and is achieving significant cost savings, which will allow it to make further investments in the business, and in IT and digitalisation. The Group continues to focus on cost control. Total operating expenses (excluding the Bank Levy and other regulatory costs) reduced by 9% in 1H19 YoY, largely owing to significantly lower costs associated to legacy issues.

The Group has a sound funding and liquidity position, which was also strengthened after the issuance of the holding company senior debt in October 2019. Its funding profile is largely underpinned by a stable customer deposit base, which represented 95% of total non-equity funding at end-1H19. The loan to deposit ratio continued to benefit from loan deleveraging and was 91% at end-1H19. The Group also enjoys a strong liquidity position: at end-1H19 the available liquidity buffer was EUR 7.4 billion or 34% of total assets. Following the repayment of its European Central Bank funding at end-2018 the Group has zero central bank funding, which DBRS Morningstar views positively.

DBRS Morningstar considers the Group’s capital position as having significantly strengthened following the NPL sales. At end-1H19, the Group’s fully loaded Common Equity Tier 1 (CET1) ratio was 14.4% and its total capital ratio was 15.8%, and it has a medium-term target of 13% for its fully loaded CET1 ratio which would continue to provide a sound cushion over its minimum capital requirements. Including the Countercyclical buffer (CCyB) of 1%, introduced in Ireland as of July 2019, the minimum CET1 ratio (phased-in) requirement increased to 11.45% and to 14.95% in terms of total capital.

The Grid Summary Grades for PTSB are as follows: Franchise Strength – Good/Moderate; Earnings – Moderate/Weak; Risk Profile –Moderate; Funding/Liquidity – Good/Moderate; Capitalisation – Moderate.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include company disclosures, Central Bank of Ireland and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance

For further information on DBRS Morningstar 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: Maria Rivas Escrigas, Senior Vice President - Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: October 27, 2009
Last Rating Date: December 7, 2018

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