DBRS Morningstar Confirms Bank of Ireland at A (low), Trend Revised To Negative

DBRS Ratings GmbH (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). The trend has been changed to Negative from Stable. 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) remains at A (low). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The change in trend of BOI’s Long-Term Issuer rating to Negative reflects the wide economic and market disruption resulting from the Coronavirus Disease (COVID-19) pandemic and the negative impact this is having on the operating environment for banking in Ireland and the UK. DBRS Morningstar expects this to reduce BoI’s ability to absorb losses. Moreover, the Bank’s asset quality is expected to deteriorate in coming quarters due to the impact of the lockdown, and this will become more visible when the debt moratoria that have been granted come to an end, and we expect this to negatively impact the Bank’s profitability through higher loan loss provisions. Exposure to potentially more vulnerable sectors could also be severely affected in this environment, reversing the improvement seen in recent years in asset quality. The implications for the medium to long-term will depend on the evolution of the outbreak, the length of the economic shutdown and subsequent economic recovery. Downward rating pressure would intensify should the crisis be prolonged.

In confirming BOI’s Long-Term Issuer rating at A (low), DBRS Morningstar takes into account the Bank’s large capital cushions which can absorb, at least, the initial impact of asset quality deterioration that will arise in the coming quarters. BoI’s ratings continue to incorporate the benefit of its leading banking and life insurance franchise in the Republic of Ireland and its meaningful operations in the UK, as well as the Bank’s sound funding and liquidity position.

RATING DRIVERS

Given the challenging operating environment driven by COVID-19, an upgrade of the ratings is unlikely. The Trend would return to Stable if the COVID-19 crisis does not translate into material asset quality deterioration and the impact is manageable from a profitability and capital perspective.

A downgrade of the Bank’s Long-Term Issuer Rating could result from a material impact on asset quality and capital as a result of the COVID-19 pandemic.

RATING RATIONALE

The Bank has already marked the negative impact of COVID-19 in Q1, when it posted a pre-tax loss of EUR 241 million driven by higher loan loss provisions and lower revenues due to mark to market losses on certain financial assets.

Operating revenues were significantly down Year-on-Year (YoY) in Q1 largely driven by the negative impact from the widening of credit spreads and equity markets volatility in unit linked products and some losses in the insurance and wealth management bond portfolio. For 2020, management expects lower revenues due to a combination of lower fees and significantly lower lending volumes. The cost of risk was 133 bps in Q1.

BOI has exposure to a wide range of sectors, some of which could potentially be more severely affected by the economic lockdown and downturn. At end-2019, BOI’s exposure to these sectors (including among others real estate and construction, distribution, retail, business, transport sectors and consumer lending) represented around 32% of total end-2019 gross loans, DBRS Morningstar recognises that the Bank starts this crisis with an improved balance sheet and with significantly reduced levels of Non-Performing Loans (NPLs, as defined by the European Banking Authority, EBA). The NPL ratio was 4.2% at end-Q1. The Bank has improved its recovery of bad loans, however a large part of the NPL reduction achieved by the Bank in recent years was supported by sales of NPLs to institutional investors, which could be difficult to continue in a more difficult banking environment.

BOI enters this crisis with a solid capital position. At end-Q1, the Bank had a CET1 transitional ratio of 14.4% which translates into a cushion of around 513 bps over new 2020 regulatory requirement (after the removal of the countercyclical buffers for exposures in Ireland and in the UK), equivalent to around EUR 2.6 billion. This supports the confirmation of the ratings. The Bank’s funding and liquidity position remains strong and the bank reported a Liquidity Coverage ratio (LCR) of 140% at end-Q1.

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 and Q1 2020 Trading update, 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

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/361276

Ratings assigned by DBRS Ratings GmbH, are subject to EU and U.S. regulations only

Lead Analyst: Pablo Manzano, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: September 6, 2005
Last Rating Date: March 31, 2020

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