DBRS Morningstar Confirms PTSB’s Long-Term Issuer Rating at BBB (Low), Negative Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long-Term Issuer Rating of Permanent tsb p.l.c (the Bank or PTSB) at BBB (low) and the Long-Term Issuer Rating of Permanent TSB Group Holdings p.l.c (PTSBG or the Group), the top-level holding company, at BB (high). The Bank’s Short-Term Issuer Rating was confirmed at R-2 (middle), and PTSBG’s Short-Term Issuer Rating was confirmed at R-3. The trends on all ratings remained Negative. The Bank’s Intrinsic Assessment (IA) is BBB (low) 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 confirmation of the ratings, with a Negative Trend, reflects the challenging operating environment in Ireland and the uncertain consequences of the COVID-19 pandemic on the Bank's asset quality, earnings and capitalisation. While DBRS Morningstar recognises PTSB’s progress in reducing non-performing loans (NPLs) in recent years, the real impact of the pandemic on the Bank´s asset quality remains uncertain, particularly once government support measures are removed. The ratings also reflect the persistent pressure on revenues due to the low interest rate environment, as well as the covid-related increase in loan loss provisions that led to a net loss in 2020. The ratings however, continue to incorporate PTSB’s sound capital position, with large cushions against minimum regulatory requirements as well as the bank’s comfortable liquidity and funding position, underpinned by a large and stable customer deposit base.

RATING DRIVERS

An upgrade of the ratings is unlikely in the current challenging environment. The Trend would likely return to Stable in the absence of significant asset quality deterioration once government support is withdrawn. Over the longer term, an upgrade of the ratings could arise if the Bank continues to reduce NPLs while improving cost efficiency.

A downgrade of the Bank’s ratings would likely be driven by a material impact on asset quality, profitability and/or capital.

RATING RATIONALE

PTSBG is a banking group operating in the Republic of Ireland (ROI) which mainly provides traditional retail and commercial banking products to its individual, and to a lesser extent SME, clients. The Group maintains a meaningful market share in the residential mortgage segment (17.9% in Q1 2021) as well as a 12% market share in current accounts and 11% in retail deposits. In February 2021, PTSB announced it was in early discussions with NatWest Group (NatWest) in order to acquire a portfolio of performing loans of its Irish subsidiary Ulster Bank Ireland DAC Plc, the third largest bank in Ireland, after NatWest announced its decision to exit the Irish market. DBRS Morningstar notes that the transaction, if finalised, would be transformational, potentially doubling the size of the Bank's current loan portfolio and allowing PTSB to significantly increase its market share in the residential mortgage segment, as well as possibly increase its exposure towards consumers and SMEs in line with its effort to diversify its exposure in these segments.

DBRS Morningstar views profitability as a key challenge for PTSBG. Historically low earnings generation has been undermined by the challenging operating environment and the COVID-19 related provisions. In 2020, PTSB reported a net loss of EUR 162 million compared to a net profit of EUR 30 million in 2019, as a result of significantly higher loan loss provisions (LLPs) and lower revenues. PTSB's revenue generation remains under pressure mostly due to the persistent low interest rate levels and subdued lending growth with total operating income decreasing by 9% YoY in 2020. The cost-to-income ratio remains fairly high compared to international and domestic peers. Due to lower income, the underlying cost-to-income ratio deteriorated to 86% in 2020 from 80% in 2019. In 2020, loan loss provisions (LLPs) significantly increased to EUR 155 million from EUR 10 million in 2019. The majority of LLPs were associated to the post-model adjustments against the disruption of the COVID-19 pandemic (EUR 110 million). As a result, the Group's reported cost of risk increased to 103 basis points (bps) in 2020 from 6 bps in 2019.

PTSBG's risk profile is moderate, with credit risk mainly stemming from the Group's residential mortgage portfolio which accounted for 66% of total assets at end-2020. Asset quality is a key rating consideration for PTSB as NPLs and the NPL ratio remain high although DBRS Morningstar recognizes the good progress made in this respect. PTSBG’s NPL ratio at end-2020 was 7.6% compared to 6.4% at end-2019 largely attributable to deleveraging (gross loans to customers decreased by 9% YoY) due to the sale of EUR 1.4 billion gross performing buy-to-let mortgages to Citibank NA in July 2020 (Glenbeigh II transaction). Total gross NPLs increased to EUR 1,128 million (+7% YoY) at end-2020 mostly due to EUR 50 million expired payment breaks (PB) exposure which needed additional forbearance measures. However, NPLs remained almost flat at end-Q1 2021 and the NPL ratio was unchanged, as new defaults were offset by organic recovery. In DBRS Morningstar’s view the actual impact of the long term effects of the pandemic on asset quality remain uncertain. According to management, around 5% (or EUR 100 million) of total PBs have required additional forbearance measures and are therefore reclassified as Stage 3 at end-Q1 2021. An additional 4% of PBs (or EUR 80 million) might require forbearance measures going forward according to the Bank.

PTSBG’s funding profile is considered good supported by a stable retail customer deposit base. At end-2020, customer deposits represented 96% of total funding at EUR 18,039 million of which around 90% were retail deposits. Due to higher savings during the lockdown period, customer deposits increased by 5% YoY. In particular, retail current accounts increased by 24% YoY. At end-Q1 2021, customer deposits increased further to EUR 18.3 billion. As a result, the loan-to-deposit ratio improved to 77% at end-Q1 2021 from 79% at end-2020 and 91% at end-2019. In Q1 2020, PTSBG issued additional MREL eligible senior unsecured debt of EUR 50 million. In Q4 2021, the Group issued a EUR 125 million AT1 instrument out of the HoldCo and redeemed the EUR 125 million AT1 bond issued at the bank. The liquidity position is sound with an LCR ratio of 276% at end-2020 from 209% at end-Q3 2020 and 170% at end-FY19.

PTSBG's capital position remains sound and the Bank maintains strong cushions against the minimum regulatory capital requirements. The fully loaded CET1 ratio was 15.6% at end-Q1 2021, increasing from 15.1% at end-2020 and 14.6% at end-2019. On a transitional basis, the CET1 ratio was 17.8% compared to 18.1% at end-2020 and 17.6% at end-2019 while the total capital ratio was 19.8% compared to 21% at end-2020. The improvement of the CET1 ratio at end-2020 was driven by lower risk weighted assets as a result of the buy-to-let loan portfolio sale in 2020 (Glenbeigh II transaction), partially offset by the impact of the net loss in 2020. The bank’s cushion against the CET1 minimum Supervisory Review and Evaluation Process (SREP) requirement of 8.94% in 2020 was sound at 666 bps. PTSBG has a fully loaded CET1 ratio target of 13.5%.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

DBRS Morningstar notes that this Press Release was amended on 7th June, 2021 to include the name of Rating Committee Chair.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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

The sources of information used for this rating include PTSBG’s Annual Report 2020, PTSBG’s Investor Presentation 2020, PTSBG’s Pillar 3 Report, PTSBG’s Q1 Trading Statement 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 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/378417

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mario De Cicco, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG and Global FIG
Initial Rating Date: October 27, 2009
Last Rating Date: May 19, 2020

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