DBRS Morningstar Confirms Bank of Ireland’s LT Issuer Rating at A (low), Trend Revised to Stable

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 Bank’s Long-Term ratings has been revised to Stable, while 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 change of the trend to Stable reflects BOI’s improved profitability in 2021, as the impact of the financial disruptions generated by the COVID-19 pandemic on the Bank’s profitability has been less severe than previously anticipated, and that the Bank has been able to successfully continue to manage down its stock of non-performing loans (NPLs) through both asset sales and organic recoveries. The ratings continue to reflect BOI’s franchise strength as one of the two dominant financial institutions in the Republic of Ireland, its business diversification in the UK market, its sound capital position with comfortable cushions over minimum regulatory requirements as well as its robust funding and liquidity profile.

Nevertheless, DBRS Morningstar notes that with the recent spread of new COVID-19 variants and the reintroduction of some restrictive economic measures, some uncertainty remains regarding the long-term impact of the pandemic on the Bank’s asset quality and profitability, especially once the government support measures are fully removed.

RATING DRIVERS

An upgrade of the Long-Term ratings would require a sustained improvement in core profitability as well as further reduction of NPLs, while maintaining the current capital position.

The Long-Term ratings would be downgraded if there was a material deterioration of the Bank's asset quality and/or profitability.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong / Good

Bank of Ireland is one of the two predominant banks in the Republic of Ireland (ROI) with a strong and relatively diverse domestic franchise, as well as a solid franchise in the UK that provides some geographical diversification. In the ROI, BOI had a 23% market share in new mortgage lending in H1 2021 and holds leading market positions in corporate and SME lending, wealth management and bancassurance. The UK loan portfolio accounted for 37% of the Bank’s total gross loans at end-H1 2021. BOI is currently undertaking a strategic review of its UK business with the aim to focus on higher margin segments and operate with a smaller balance sheet and reduced operating and funding costs. In 2021, BOI announced two acquisitions. In July 2021, the Bank announced that it had reached an agreement for the acquisition of J&E Davy (Davy), the Irish market leader in wealth management and capital market services, and in October 2021, BOI signed a legal binding agreement with KBC Bank Ireland (KBCI) for the acquisition of a portfolio of EUR 9.2 billion of customer loans and EUR 4.4 billion of customer deposits. The KBCI transaction remains subject to CCPC approval.

Earnings Combined Building Block (BB) Assessment: Moderate / Weak

BOI's profitability improved significantly in H1 2021 to EUR 341 million vs H1 2020 (net loss of EUR 725 million), mainly supported by the lower cost of risk, but also incorporating the resilient revenue generation and continued cost discipline. Loan loss provisions reduced to EUR 1 million in H1 2021 from EUR 937 million in H1 2020, mostly reflecting the improved macroeconomic outlook in the credit models. Despite the persistent pressure from low interest rates, BOI’s net interest income (NII) increased by 1.5% Year-on-Year (YoY) driven by the application of negative interest rates on some customer deposits and lower funding costs in the UK. Non-interest income (excluding other gains and valuation items) went up 6% YoY, largely driven by the strong performance of the Wealth and Insurance and the Corporate and Markets divisions as a result of the revived economic activity after the lockdown period. DBRS Morningstar notes that BOI continued to be disciplined in cost management with underlying operating expenses (excluding one-off items, regulatory charges and impairment of intangible assets) reducing by 4% YoY in H1 2021. Including regulatory charges and impairment of intangibles, the cost-income ratio improved to 67% in H1 2021, from 78% in H1 2020.

Risk Combined Building Block (BB) Assessment: Good / Moderate

After the EUR 1 billion increase in NPLs at end-2020, partially driven by the implementation of a new Definition of Default, BOI’s stock of NPLs (as reported by the Bank in line with the European Banking Authority definition) reduced to EUR 4.2 billion at 9M 2021, down 7% vs. end-2020. This was mainly driven by the sale of a EUR 0.3 billion portfolio of Irish residential mortgage NPLs. In line with other Irish peers, BOI has been proactive in recognising the impact of the COVID-19 vulnerabilities in its lending portfolio which led to a significant increase of Stage 2 loans, especially in the non-property SME and corporate and the property and construction portfolios. Total Stage 2 loans were EUR 17.8 billion at end-H1 2021, up 13% vs. end-2020 and representing 22.5% of total gross loans. DBRS Morningstar will continue to closely monitor the performance of these loans.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good

DBRS Morningstar considers BOI’s funding profile as sound and relatively well diversified. Customer deposits were the main source of funding, accounting for 80% of total funding at end-H1 2021. At end-H1 2021, customer deposits continued to increase to EUR 90.6 billion, up 2% compared to end-2020, leading to a loan-to-deposit ratio of 85%, compared to 86% at end-2020 and 95% at end-2019. The Bank accessed T-LTRO III for EUR 10.8 billion in H1 2021, mostly to benefit from its positive impact on profitability. At end-H1 2021, BoI reported a Liquidity Coverage Ratio of 177%, up from 153% at end-2020, and a Net Stable Funding Ratio of 138%, stable vs. end-2020.

Capitalisation Combined Building Block (BB) Assessment: Good / Moderate

BoI’s capital position is considered sound, supported by a high cushion against minimum requirements. On a fully-loaded basis, the Bank reported a CET1 ratio of 14.6% at end-Q3 2021, compared to 13.4% at end-2020 and 13.8% at end-2019. In July 2021, the minimum CET1 ratio requirement (on transitional basis) was 9.77% which compares to a CET1 ratio transitional of 15.7% at end-Q3 2021, translating into a capital cushion of 593 basis points (bps). DBRS Morningstar expects BOI’s CET1 ratio to decrease in the short term taking into account the negative impact of the two pending acquisitions, the Bank has estimated the impact to be around 200 bps. DBRS Morningstar also notes that the Bank has recently completed two credit risk transfer transactions on a portfolio of Irish mortgage loans and a portfolio of European and US acquisition finance loans. The transactions are expected to have a positive impact on the CET1 ratio of around 30 bps and 40 bps respectively. This would lead to a CET1 ratio above 13% on a fully-loaded basis, which DBRS Morningstar considers in line with management targets.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/390978

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.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/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

The sources of information used for this rating include Morningstar Inc. and Company Documents, BOI’s Annual Report 2019 and 2020, BOI’s Interim Reports H1 2020 and H1 2021, BOI’s Presentations 2020 and H1 2021, BOI’s Q3 2021 Trading Update. 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/390979

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 FIG
Initial Rating Date: September 6, 2005
Last Rating Date: May 19, 2021

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