DBRS Morningstar Confirms Allied Irish Banks Plc’s LT Issuer Rating at A (Low), Trend Remains Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Allied Irish Banks Plc (AIB or the Bank), including the Long-Term Issuer Rating at A (low) and the Short-Term Issuer Rating at R-1 (low). The Long-Term ratings’ Trend remain Negative and Stable for the Short-Term ratings. 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 the Negative trend reflects the challenging operating environment and the negative impact that the COVID-19 crisis is having on the Bank’s asset quality and profitability. AIB reported a consolidated net loss largely as a result of higher loan loss provisions related to the update of macroeconomic assumptions driven by COVID-19.
After a number of years of reductions, Non-performing Loans (NPL) have increased over the past 12 months, partly reflecting the impact of the pandemic. As a result, AIB’s NPL ratio weakened to 6.5% at end-Q1 2021 from 5.4% at end-2019 although the Bank offset some of the increase in NPLs by completing a NPL portfolio sales in Q1 2021. DBRS Morningstar considers that AIB, in line with other Irish Banks has been proactive in recognising the vulnerabilities of the current operating environment. AIB has categorised a relatively high proportion of loans as Stage 2 loans, and uncertainty remains regarding the degree of these loans potentially turning into NPLs particularly when government support measures come to an end. In addition, revenues remain under pressure from the low interest rate environment. AIB’s ratings continue to reflect the Bank’s solid capital position with ample cushions over regulatory minimum requirements and its sound funding and liquidity position underpinned by a robust retail franchise in the Republic of Ireland.

RATING DRIVERS

An upgrade of the Long-Term ratings is unlikely in the current operating environment and would require a significant improvement of core profitability as well as a significant reduction in NPLs. For the trend to return to Stable, it would require evidence that the COVID-19 environment does not materially impact asset quality and earnings when government support measures for customers come to an end.

A downgrade of the Long-Term ratings would arise if the effect of the pandemic translates into a material deterioration of asset quality and capital.

RATING RATIONALE

AIB is a leading retail and commercial bank in Ireland and one of two predominant Irish financial institutions. The Bank has dominant market shares in the Republic of Ireland including 36% in main personal current accounts, 20% in personal loan, 35% in credit cards, 28.4% in new mortgages, 41% in SMEs main loan and 43% in SMEs credit cards. AIB has a presence in the UK where it offers commercial banking services to retail customers in Northern Ireland. AIB has exited the SME market in Great Britain refocusing towards large corporates in specific sectors including healthcare, renewables and infrastructure. Under the 2021-2023 Strategic plan, the Bank aims to expand its product offering in the wealth management and insurance segments, partly through the recently announced acquisition of Goodbody and a joint venture with Great-West LifeCo. Moreover, AIB has signed a memorandum of understanding for the acquisition of around EUR 4 billion corporate loans from Natwest’s subsidiary Ulster Bank which is exiting the Irish market.

AIB's profitability is under pressure from the current challenging operating environment driven by Covid-19 and persistent low interest rates. In 2020, the Bank reported a net loss of EUR 741 million (vs. EUR 364 million net profit in 2019) affected by lower operating income and significantly higher loan loss provisions Year-on-Year (YoY) (LLPs). The decline in revenues was more visible in Net interest income, which decreased by 10% YoY due to lower lending volumes and lower contribution from matured high-yield investment securities and higher costs of excess liquidity, partially compensated for by lower funding costs. DBRS Morningstar notes, however, that AIB remains focused on cost management initiatives which helped the statutory cost-to-income ratio improve to 78% in 2020 from 82% in 2019. Excluding exceptional items, bank levies and regulatory fees, the cost-to-income ratio was 64% in 2020, increasing from 56% in 2019. LLPs increased to EUR 1,460 million in 2020 from EUR 16 million in 2019 leading to a cost of risk of 240 basis points (bps), significantly higher than 3 bps in 2019. Around 27% of the LLPs were driven by the macroeconomic update of the IFRS9 models, 46% by credit deterioration within COVID-19 impacted sectors and 27% by post-model adjustments which take into consideration legacy non-performing mortgage exposures and COVID-19 overlays. In Q1 2021, AIB returned to profit thanks to lower provisions (EUR c.50 million, equal to a cost of risk of 35 bps) and higher net fees and other income despite the continued pressure on NII.

DBRS Morningstar recognises the good track record of the Bank in reducing non-performing loans mainly thanks to significant sales of NPLs to institutional investors, with the last sale completed in Q1 2021. However, NPLs (as reported by the Bank in line with the European Banking Authority definition) increased to EUR 4.3 billion at end-2020, 30% higher than 2019. Net of the implementation of a new definition of default (DoD), which had an incremental effect of EUR 200 million on total gross NPLs, the increase was mostly due to credit deterioration within sectors deemed vulnerable to the COVID-19 pandemic such as CRE retail shopping centres, hotels, bars and restaurants. As a result, AIB's NPL ratio rose to 7.3% at end-2020 from 5.4% at end-2019. In Q1 2021, AIB has performed two sales of deep arrear (long overdue) NPE portfolios for a total amount of EUR 700 million which reduced its pro-forma NPL ratio to 6.5% and total NPLs to EUR 3.8 billion.

DBRS Morningstar views AIB's funding profile as sound and stable, underpinned by the Bank's large customer deposit base. At end-Q1 2021, customer deposits increased further to EUR 84.5 billion, 3% up vs. end-2020 and the loan-to-deposit ratio improved to 67% from 85% at end-2019. AIB’s liquidity profile is strong, supported by a liquidity coverage ratio (LCR) of 193% at end-2020 (vs. 157% at end-2019) and a net stable funding ratio (NFSR) of 148% (vs. 129% at end-2019).

A key consideration for the confirmation of the ratings is AIB's solid capital position with ample cushions over regulatory minimums. At end-Q1 2021, AIB had a fully-loaded CET1 ratio of 15.8%, significantly above the minimum requirement of 9.69%. This translates to a capital cushion of 611 basis points, which should help the Bank to navigate the current operating environment. The fully-loaded CET1 ratio was down from 17.3% at end-2019 largely impacted by the net loss reported at year-end, as well as several regulatory adjustments including the implementation of the targeted review of internal models (TRIM) and additional review of SME models. The fully-loaded CET1 ratio also remains in excess of the CET1 ratio management target of >14%.

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 AIB are as follows: Franchise Strength – Strong/Good; Earnings Power – Good/Moderate;
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 (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 AIB’s Annual Report 2020, AIB’s Investor Presentation 2020, AIB’s Pillar 3 Report, AIB’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.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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. 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/378619

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 20, 2005
Last Rating Date: May 19, 2020

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