DBRS Morningstar Upgrades AIB’s Long-Term Issuer Rating to A (low), Stable Trend

DBRS Ratings Limited (DBRS Morningstar) upgraded the Long-Term Issuer Rating of Allied Irish Banks p.l.c. (AIB or the Bank), to A (low) from BBB (high). The trend has been changed to Stable from Positive. At the same time, DBRS Morningstar confirmed the Short-Term Issuer Rating of R-1 (low) with Stable Trend. The support assessment remains SA3 and the Intrinsic Assessment (IA) moved up to A (low) from BBB (high). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The upgrade of the Long-Term Issuer Rating reflects AIB’s progress in further reducing its non-performing loans (NPLs), as well as in sustaining core revenues in the very low interest rate environment. The ratings continue to incorporate AIB’s strong domestic franchise, its sound funding and liquidity position and its strong capital position, which has also strengthened with the sale of NPLs.

RATING DRIVERS

Further positive rating pressure would require a material improvement in core profitability, particularly through revenue growth, as well as continued NPL reduction.

Negative rating pressure would arise from a deterioration in core profitability or an increase in the Bank’s risk profile. A deterioration in the Irish economy that substantially impacted the Bank’s financial fundamentals and asset quality, potentially as a result of the UK leaving the EU, would also be viewed negatively.

RATING RATIONALE

With total assets of EUR 95.6 billion at H1 2019, AIB is one of the two predominant banking groups operating in the Republic of Ireland (RoI). It offers a wide range of retail, commercial and corporate banking services within RoI, whilst also providing retail and commercial banking services in Great Britain and Northern Ireland through its subsidiary, AIB Group (UK) plc.

AIB reported net attributable income of EUR 361 million in H1 2019, considerably below the EUR 650 million the year before, although DBRS Morningstar notes that this was mainly due to significant write backs in H1 2018 that were not repeated in H1 2019. However, H1 2019 results benefitted from resilient margins and growing commissions. The Bank’s net interest margin (NIM) remained broadly stable at 2.46% as the impact of new lending volumes and reduction of the cost of customer deposits largely offset the lower revenues from securities and the higher wholesale funding costs from new MREL instruments issued in H1 2019. Net fees and commissions were also up 6% YoY in H1 2019. DBRS Morningstar views that the Bank remains focused on cost discipline following the increase in operating expenses in H1 2019 YoY. The cost to income ratio, as reported by the bank and excluding bank levies, regulatory fees and exceptional items largely associated to redress and tracker mortgages provisions, slightly weakened to 54% in H1 2019 from 51% in H1 2018. Loan impairment charges were very low at EUR 9 million.

AIB’s further significant reduction of NPLs (as defined by the European Banking Authority, EBA) is also a key consideration for the rating upgrade. In April 2019, the Bank sold EUR 1 billion of NPLs to Cerberus Capital Management and in November 2019 it reached an agreement to sell a further EUR 850 million NPL portfolio. Including this transaction, which is expected to be completed in Q1 2020, NPLs were down by 39% to EUR 3.7 billion from EUR 6.1 billion at end-2018. The EBA NPL ratio pro-forma improved further to around 6% at end-September 2019 (including a portfolio sale announced in November 2019) from 9.6% at end-2018. In addition, management expects to achieve a circa 5% NPL ratio by end-2019.

AIB’s funding position is underpinned by a stable and large customer deposit base that accounts for 90% of total non-equity funding at end-H1 2019. The net loan to deposit ratio (as calculated by DBRS Morningstar) was 88%. AIB also has a strong liquidity profile and the Bank has a total liquidity pool of EUR 27.5 million at end-H1 2019, representing around 29% of total assets at that date. At end-H1 2019 the Liquidity Coverage Ratio was 141% while the Net Stable Funding Ratio was estimated at 127%.

DBRS Morningstar considers that AIB’s capital position has strengthened following the sale of NPLs. The Bank’s fully loaded Basel III Common Equity Tier 1 (CET1) ratio was 16.5% at Q3 2019, down from 17.9% at Q3 2018, primarily affected by the impact of the 2019 Mortgage TRIM exercise which had a negative impact of around 90 bps. The Bank expects the CET1 fully loaded ratio to be circa 16% at end-2019, after dividend distribution, a level that DBRS Morningstar considers compares favourably with domestic and most European peers. AIB’s leverage ratio was very high with the fully-loaded CRDIV leverage ratio at 9.8% at end-H1 2019.

The Grid Summary Grades for Allied Irish Banks p.l.c.are as follows: Franchise Strength – Strong/Good; Earnings Power – Good; Risk Profile – Moderate; Funding & Liquidity – Strong/Good; Capitalisation – Good.

Notes:
All figures are in EUR unless otherwise noted.

The principal 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 European Banking Authority, company disclosures 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.

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 Morningstar had no access to relevant internal documents for the rated entity or a related third party.

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, Senior Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: October 20, 2005
Last Rating Date: April 15, 2019

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