DBRS Morningstar Confirms Bank of Ireland at A (low)/R-1 (low), Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of The Governor and Company of the Bank of Ireland (BoI or the Bank), including the Long-Term Issuer Rating of A (low) and the Short-Term Issuer Rating of R-1 (low). The trend on all ratings remains Stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) is A (low). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of BoI’s ratings takes into account the Bank’s resilient profitability and ability to cope with the low interest rate environment, as well as continued progress in improving asset quality through further reduction of non-performing loans (NPLs). BoI’s ratings continue to incorporate its leading banking and life insurance franchise in the Republic of Ireland and its meaningful operations in the UK. The confirmation of the ratings also takes into account the Bank’s sound funding and capital position, supported by sound internal capital generation. However, the ratings continue to reflect a still above European Banks’ average NPL ratio and lower NPL coverage levels than most peers, as well as the Bank’s relatively high cost-to-income ratio.

DBRS Morningstar considers that the impact of the Coronavirus outbreak (COVID-19) on the Bank will largely depend on the degree of deterioration in the Irish and UK economies, as well as how long the disruption in the financial markets persists. Moreover, the economic deterioration will negatively impact the Bank’s asset quality potentially pressuring profitability. DBRS Morningstar will continue to monitor the developing situation and potential impact of the COVID-19 outbreak on profits, asset quality and funding whilst taking into account the significant relief measures being taken by governments and regulators.

RATING DRIVERS
Given the current difficult operating environment as a result of the COVID-19 outbreak an upgrade of the ratings is unlikely. However, a material improvement in profitability and efficiency, combined with continued progress in asset quality, could lead to an upgrade of the Bank’s Long-Term Issuer Rating.

A reversal in asset quality indicators, and/or if BoI’s profitability and capital were substantially impacted as a result of the COVID-19 outbreak could lead to a downgrade of the Bank’s Long-Term Issuer Rating.

RATING RATIONALE
With total assets of EUR 132 billion as of end-2019, BoI is the largest Irish bank by total assets. BoI has a diverse domestic franchise that combines retail banking, commercial banking and life insurance. In Ireland, BoI holds market leading positions across many principal product lines in retail and commercial banking while in the UK it has a variety of businesses including mortgage and consumer lending, and foreign exchange.

In 2019, BoI reported net attributable income of EUR 386 million, down 38% year-on-year (YoY), primarily reflecting more normalised levels of loan impairment charges and an additional provision for tracker mortgages. Results were supported by gains on the sale of securities and strong growth of commissions. The Bank’s net interest income (NII) grew slightly by 1% YoY benefiting from strong loan growth, and lower retail funding costs offset the higher wholesale funding costs YoY largely related to the issue of MREL debt in 2019. DBRS Morningstar considers that the Bank maintains a sound cost discipline, as indicated in staff costs being flat YoY. The cost-to-income ratio (as calculated by DBRS Morningstar) of 68%, however, remains higher than some of its European peers, partly reflecting restructuring costs and investment to enhance IT and digital capabilities. Loan impairment charges totaled EUR 214 million, a significant increase from reversals of EUR 42 million in 2018 . However, we consider the 2019 loan loss provisions as reflecting a more normalised levels of provisions after many years of significant reversals.

BoI continued to make good progress in asset quality in 2019, in line with the progress seen in the last two years. At end-2019, the Bank’s gross NPLs, as defined by the European Banking Authority (EBA), further reduced to EUR 3.5 billion, down from EUR 5 billion at end-2018 and EUR 6.5 billion at end-2017 . As a result, the NPL ratio improved to 4.4% from 6.3% a year ago. Total NPL coverage levels improved to 37% at end-2019 from 35% the year before , which continues to be at the lower end of its European peer group. Although it is still early stage, we will also closely monitor the potential negative impact of the COVID-19 outbreak on the Bank’s asset quality.

BoI’s funding and liquidity profile remains solid underpinned by a large customer deposit base and high level of liquid assets. Customer deposits is the principal funding source, accounting for 88% of total non-equity funding and the Bank has only moderate level of wholesale market funding. Total deposits grew strongly in 2019 (up 6.5% YoY) , largely reflecting increased deposits in ROI as a result of current accounts growth. As a result the net loan-to-deposit ratio was a sound 95%. The Bank’s liquidity profile is strong. At end-2019, BoI had liquid assets of EUR 27 billion, representing 21% of total assets at end-2019, and the Liquidity Coverage Ratio was 138%.

DBRS Morningstar views BoI’s capital position as sound, partly supported by progress in de-risking. BoI reported a fully loaded Common Equity Tier 1 (CET1) ratio of 13.8% at end-2019 , 40 basis points (bps) up YoY, as retained earnings and some capital initiatives to reduce RWAs fully offset the growth of RWAs arising from loan growth. On a transitional basis, the CET1 ratio was 15.0%, 355 bps over minimum regulatory requirements for 2020. Taking into account recent measures taken by regulators to ensure banks have flexibility to cope with the COVID-19 challenges, when excluded the countercyclical buffer requirements, BoI would have a buffer of 475 bps over minimum regulatory requirements. In addition, the ECB has announced that banks will also be allowed to partially meet the Pillar 2 Requirement (P2R) with excess Additional Tier 1 or Tier 2 capital, which would mean an additional cushion of 30 bps. The fully loaded leverage ratio was also strong at 6.5% at end-2019.

Concurrently, DBSR Morningstar has discontinued BoI’s Subordinated Notes due 2020 with ISIN XS0487711573 and ISIN XS0487711656 as the notes have been repaid.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

The Grid Summary Grades for The Governor and Company of the BoI are as follows: Franchise Strength – Strong; Earnings Power – Good; Risk Profile – Good/ Moderate; Funding & Liquidity – Strong; Capitalisation – Good.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019). -https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

The sources of information used for this rating include BoI’s 2019 Annual Report, BoI’s 2019 Annual Results Presentation, 2019 European Banking Authority Transparency Exercise 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.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

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 12-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

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/359076

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: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: September 6, 2005
Last Rating Date: April 12, 2019

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