DBRS Morningstar Confirms Bank of Ireland’s LT Issuer Rating at A (Low), Trend Remains Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of The Governor and Company of the Bank of Ireland (Bank of Ireland, BoI or the Bank), including the Long-Term Issuer Rating at A (low) and the Short-Term Issuer Rating at R-1 (low). The trend on the long-term ratings remains Negative and the trend on the short-term 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 Negative trend continues to reflect the challenging operating environment and the uncertainty related to the impact of the COVID-19 pandemic on the Bank´s profitability and asset quality. In recent years the Bank has successfully reduced its stock of non-performing loans (NPLs) through a combination of organic recovery and asset disposals, however, in 2020, NPLs increased, partly reflecting the impact of the challenging environment. DBRS Morningstar recognises that BOI, similar to other Irish Banks, has been proactive in reflecting the impact of the COVID-19 pandemic on its lending portfolios, as during 2020 Stage 2 loans almost tripled compared with end-2019, especially in the sectors most vulnerable to COVID-19. DBRS Morningstar also notes that uncertainty remains regarding asset quality deterioration once government support measures are withdrawn. The confirmation of the ratings takes into account BOI’s sound capital position with comfortable cushions over minimum regulatory requirements, its robust funding and liquidity profile as well as its leading domestic retail franchise in the Republic of Ireland and business diversification in the UK market.

RATING DRIVERS

An upgrade of the Long Term Issuer Rating is unlikely in the current difficult operating environment and would require a significant reduction of the Bank's NPLs as well as a sustained improvement in core profitability. The change of the trend to Stable would require evidence of a limited impact of the COVID-19 pandemic on the Bank´s asset quality and the return to a more normalised level of profitability.

A downgrade of the Long-Term Issuer Rating would arise if the effects of the pandemic were to lead to a material deterioration of the Bank´s asset quality, profitability and/or capital position.

RATING RATIONALE

Bank of Ireland is the largest bank in the Republic of Ireland by total assets and one of the two dominant banking groups. The Bank has a relatively diverse domestic franchise that combines retail banking, commercial banking, wealth management and life insurance businesses. In the Republic of Ireland, BoI holds leading positions in mortgage lending and bancassurance, as well as in corporate and SME lending. In Northern Ireland, BoI is a full service bank with a strong business franchise while in Great Britain it is focused on mortgage lending and consumer banking, mainly through its partnership with the UK Post Office. In April 2021, Bank of Ireland announced it had signed a Memorandum of Understanding (MoU) with KBC Group in order to acquire all of KBC Bank Ireland's performing loan assets and liabilities after the decision of the Belgian group to exit the Irish market. The transaction, if finalised, would allow BOI to further consolidate its position especially in the household mortgage segment in Ireland.

BOI's profitability has been challenged by the current difficult operating environment driven by COVID-19 and the low interest rate environment. In 2020, the Bank reported a consolidated net loss of EUR 707 million, compared to a net profit of EUR 448 million in 2019, mostly driven by higher loan loss provisions (LLPs) and lower revenues which were impacted by the restrictions to the economic activity during the pandemic and the low interest rate environment. DBRS Morningstar notes that BOI continued to be disciplined in cost management, reaching its EUR 1.7 billion underlying cost target one year before planned and setting up cost guidance for 2022 and 2023 of EUR1.65 billion and EUR 1.5 billion respectively. LLPs totalled EUR 1,133 million in 2020, significantly higher than EUR 215 million in 2019. Around 45% of total provisions were related to the update of the IFRS 9 macro-economic models, 16% were post-model adjustment to take into account the risk of COVID-19 vulnerable clients and 39% were related to specific credit deterioration. The reported cost of risk was 134 basis point (bps) in 2020, much higher than 27 bps in 2019.

Net of the implementation of a new Definition of Default, NPLs (as reported by the Bank in line with the European Banking Authority definition) increased by 11% YoY at end-2020, mostly from net inflows in the property and construction portfolio. BOI has been proactive in recognising the impact of the COVID-19 vulnerabilities in its lending portfolio which resulted in a significant increase of Stage 2 loans at end-2020, especially in the non-property corporate and SMEs and property and construction portfolios, totaling EUR 15.7 billion at end-2020, from EUR 5.6 billion at end-2019. The NPL ratio was 5.7% at end-Q1 2021, up from 4.4% at end-2019, although it remained broadly stable from end-2020.

BoI’s funding profile is strong supported by the Bank's large and stable customer deposit base. At end-Q1 2021, customer deposits increased to EUR 89.9 billion, up 1.5% compared to end-2020. The loan-to-deposit ratio was 87% at end-Q1 2021, stable vs. end-2020 and lower than the 95% level at end-2019. BOI's liquid assets amounted to EUR 42.6 billion at end-Q1 2021, increasing from EUR 31 billion at end-2020 mostly due to the participation of the Bank in the ECB’s TLTRO in March where it drew down EUR 10.8 billion. At end-2020, BoI reported a Liquidity Coverage Ratio of 153%, up from 138% a year ago, and a Net Stable Funding Ratio of 138%, up from 131% a year ago.

BoI’s capital position is considered sound, supported by a high cushion against minimum requirements which provides BOI with comfortable loss absorption capacity. On a fully-loaded basis, the Bank reported a CET1 ratio of 13.5% at end Q1 2021, compared to 13.4% at end-2020 and 13.8% at end-2019. The increase at end-Q1 2021 reflects organic capital generation partially offset by increasing risk-weighted assets linked to lending growth largely driven by the support provided to SMEs and Corporates during the pandemic. With an end-2021 minimum capital requirement of 9.77%, BOI held a capital cushion of 493 bps on a transitional basis at end-Q1 2021.

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 BOI are as follows: Franchise Strength – Strong; Earnings Power – Good;
Risk Profile – Good/Moderate; Funding & Liquidity – Strong; 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 BOI’s Annual Report 2020, BOI’s Investor Presentation 2020, BOI’s Pillar 3 Report, BOI´s Q1 2020 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/378671

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: Ross Abercromby, Managing Director, Global Financial Institutions and Sovereign Ratings
Initial Rating Date: September 6, 2005
Last Rating Date: May 21, 2020

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