DBRS Morningstar Revises PTSB’s Trend to Positive, BBB (low) Credit Ratings Confirmed

DBRS Ratings GmbH (DBRS Morningstar) confirmed the BBB (low) Long-Term Issuer Rating of permanent tsb p.l.c (the Bank or PTSB) and the BB (high) Long-Term Issuer Rating of permanent TSB Group Holdings p.l.c (PTSBG or the Group), the top-level holding company. 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 trend on all the credit ratings has been revised to Positive from Stable. 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 credit ratings in the table at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The change of the trend to Positive from Stable on PTSB’s credit ratings reflects DBRS Morningstar’s view that the Group is well positioned to enhance its long-term profitability on the back of higher interest rates, after almost a decade of ultra low interest rates, due to its strong dependence on Net Interest Income (NII). Earnings are expected to keep improving helped by a significant proportion of loans still set to reprice, its enlarged loan book after the acquisition of Ulster Bank’s portfolios and the likely persistent low deposit beta in Ireland. In addition, we expect profitability to also benefit from PTSBG’s reinforced franchise in the residential mortgage sector after the exit of KBC Bank Ireland (KBC) and Ulster Bank Ireland DAC (Ulster Bank) from the Irish banking sector.

The change in trend also reflects the Group’s progress in reducing Non Performing Loans (NPLs) since end-2016 and the improved risk profile in PTSBG’s loan book mix with a significantly lower proportion of higher risk buy-to-let (BTL) mortgages. Whilst DBRS Morningstar expects some overall deterioration in asset quality as a result of higher interest rates impacting borrowers, the impact should be manageable given the Group’s improved revenue generation capacity, the fact that less risky owner-occupied mortgages make up the majority of the loan book, as well as PTSBG’s sizable post model adjustments of EUR 118 million that represents 21% of its total provisions.

PTSBG’s credit ratings also take into account its solid capital ratios, with strong cushions over minimum regulatory requirements, as well as its sound funding and liquidity position, underpinned by its enlarged and solid customer deposit base as well as its consistent access to wholesale markets for funding since 2019.

CREDIT RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require a sustained and enhanced improvement in profitability while maintaining its current risk profile and capital levels.

The trend would return to Stable if the Group is unable to improve its profitability in a sustainable manner. A downgrade of the Long-Term Issuer Rating would result if the Group registers a sustained deterioration in the loan portfolio and/or a reduction in profitability that materially impact PTSBG’s capital position.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment:

PTSBG is the third banking group operating in the Republic of Ireland (ROI) which mainly provides traditional retail banking products and services to households and, to a lesser extent, SME customers. The Group has significantly improved its market share in the domestic residential mortgage market, which represents the vast majority of its balance sheet, from 15% at end H1 2022 to c. 21% at end-September 2023 following the exit of KBC Bank Ireland (KBC) and Ulster Bank Ireland DAC (Ulster Bank) from the Irish banking sector in H1 2023 and the acquisition of a c. EUR 6.75 billion loan book from Ulster Bank in November 2022.

The Ulster Bank transaction was meaningful as it increased the size of the Group's proforma loan portfolio at end-July 2023 by around 45% vs. end-H1 2022. The transaction included c. EUR 6.1 billion of performing non-tracker residential mortgages, c. EUR 165 million of performing micro-SME loan book and c. EUR 500 million of asset finance loans. In addition, the Group also acquired 25 branches and incorporated 330 employees from Ulster Bank.

Earnings Combined Building Block (BB) Assessment:

The Group is well positioned to benefit from the higher interest rate environment in the Eurozone, given its larger loan book after the integration of the Ulster Bank transaction, the less competitive environment in the Irish banking sector, the solid housing market in Ireland as well as the resilient domestic economy despite global macroeconomic uncertainty.

PTSBG reported a net profit of EUR 25 million at end-H1 2023 compared to a net loss of EUR 35 million in H1 2022, driven by the significant increase in NII. The return on equity (ROE), as calculated by DBRS Morningstar, stood at 2.1% at end-H1 2023. The Group’s NII rose by 92% YoY in H1 2023 largely reflecting the impact on assets of higher interest rates, a low deposit beta as well as the integration of most of the Ulster Bank portfolio since end-November 2022, which contributed to 41% of the total NII growth. DBRS Morningstar expects profitability to further improve as c.75% of the Group’s fixed rate loan book is set to reprice at higher interest rates in 2025 or later.

PTSBG’s operating costs (including regulatory charges) increased by 19% YoY in H1 2023 driven by the Ulster Bank transaction as well as continued investments in digital banking. The underlying efficiency ratio (excluding non-recurring items and regulatory levies) improved to 67% at end-H1 2023, down from 103% in H1 2022. The cost of risk was 38 basis points (bps) in H1 2023, up from 4 bps in 2022 as the Group made a EUR 30 million provision on Stage 1 loans in the Ulster Bank’s portfolio.

Risk Combined Building Block (BB) Assessment:

DBRS Morningstar views PTSBG's risk profile as modest, albeit improved, supported by the Group’s significant de-risking through asset sales and organic cure since 2016. DBRS Morningstar expects some modest deterioration in asset quality stemming from the current challenging macroeconomic environment that could potentially be mitigated in the case of PTSBG on the back of its improved earnings generation capacity as well as the fact that 92% of its loan book is comprised of owner-occupied mortgages in the Republic of Ireland, which continues to benefit from a strong and resilient domestic economy.

PTSBG’s NPL ratio was 3.2% at end-H1 2023, in line with the ratio at end-2022, but well below the NPL ratio of 5.5% at end-2021 and 7.5% at end-2020. Stage 2 loans represented 9.1% at end-H1 2023, in line with the European peer average according to the European Banking Authority, but up from 8.4% at end-2022 reflecting the impact of high interest rate and inflation on its loan book.

Funding and Liquidity Combined Building Block (BB) Assessment:

PTSBG’s funding and liquidity profile is adequate supported by a grown and solid retail customer deposit base. Customer deposits, which represented 88% of the Group’s total non-equity funding at end-H1 2023, grew by 12.6% YoY to EUR 22.6 billion at end-H1 2023 benefitting from the exit of the two major foreign banks from the Irish market. The net loan-to-deposit (LTD) ratio was 92% at end-H1 2023, up from 90% at end-2022. The Group issued two Senior Unsecured Medium Term Notes for a total amount of EUR 650 million in April 2023 and EUR 500 million in June 2023 to comply with MREL requirements. As a result, PTSBG’s total MREL ratio stood at 36.6% at end-H1 2023, compared to a MREL regulatory requirement of 28.15% set for January 2024. PTSBG’s regulatory funding and liquidity ratios remained solid with the liquidity coverage ratio (LCR) at 186% and the net stable funding ratio (NSFR) at 159% at end-H1 2023.

Capitalisation Combined Building Block (BB) Assessment:

PTSBG's capital position remains solid despite the still weak internal capital generation. The transitional CET1 ratio was 14.7% at end-H1 2023, down from 16.2% at end-2022 as a result of higher risk weighted assets after the migration of the remaining Ulster Bank’s portfolio and the loan book growth. The final migration of the Ulster Bank asset finance portfolio in July 2023 is expected to reduce the CET1 ratio by some additional 70 bps. Capital requirements are also expected to increase over the coming quarters as the Central Bank of Ireland (CBI) have announced two additional 50 bps increases on the Countercyclical Buffer (CCyB) in November 2023 and June 2024, and the Group is now considered an Other Systemically Important Institution which translates into another 50bps requirement from January 2025. However, DBRS Morningstar expects the capital cushion over minimum regulatory requirements to remain robust.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://www.dbrsmorningstar.com/research/424894.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.

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 (4 July 2023) - https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (22 June 2023). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, PTSBG’s 2021 and 2022 Annual Reports, PTSBG’s H1 2022 and H1 2023 Interim Reports, PTSBG’s 2022 and H1 2023 Presentations, and PTSBG’s Company Announcements. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit 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: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/424895.

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

Lead Analyst: María Jesús Parra Chiclano, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of Global FIG
Initial Rating Date: October 27, 2009
Last Rating Date: December 05, 2022

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