DBRS Morningstar Confirms AIB’s LT Issuer Rating at A (Low), Stable Trend

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 trend on all the credit ratings remains Stable. The Bank’s Intrinsic Assessment (IA) is A (low) and the Support Assessment remains at SA3. See the full list of credit ratings in the table at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The confirmation of AIB’s credit ratings takes into account the Bank’s strong franchise in the Republic of Ireland in both retail and corporate segments, further strengthened after the exit of Ulster Bank Ireland DAC (Ulster Bank) and KBC Bank Ireland (KBC) from the Irish banking sector. The credit ratings are also supported by the bank’s capital position, with strong capital cushions over regulatory minimum requirements, and its solid funding and liquidity profile, underpinned by its large customer base.

The Bank’s credit ratings also consider the Bank’s improved profitability and the expectation that it will be sustained going forward as a result of higher interest rates, the low deposit beta in Ireland and larger lending volumes. AIB’s credit ratings also reflect the fact that, albeit consistently improved since end-2020, asset quality remains one of the main challenges for the Bank as its NPL ratio is well above the average of the European Banking sector of 1.8% at end-June 2023 according to the European Banking Authority (EBA) and additional deterioration is expected in the short to medium term as a result of the higher interest rates and its elevated exposure to the Commercial Real Sector and Land and Development Sector (all together, Real Estate (RE)), which is currently the sector most challenged by the macroeconomic dynamics for AIB.

CREDIT RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require a further improvement in asset quality while sustaining current profitability levels and maintaining its current capital levels.

A downgrade of the Long-Term Issuer Rating would happen if there is a significant deterioration in asset quality affecting capitalization.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good
AIB is one of the largest retail bank in the Republic of Ireland (ROI) by asset size and had a robust domestic market share of 32.1% in mortgages at end-September 2023 as well as solid coverage in business loans and credit cards. The Bank also provides corporate and commercial banking in Great Britain (GB) and retail and business activities in Norther Ireland. The Irish government remains the primary shareholder with a 41% stake at end-November 2023.

AIB acquired a total portfolio of c. EUR 3.1 billion of corporates and commercial loans and c. EUR 5 billion of tracker mortgages from Ulster Bank, following its exit from the Irish banking sector. The full business portfolio and 80% of the mortgage portfolio were incorporated into the Bank’s balance sheet by end-September 2023, which has contributed to increase gross loans by 14% since end-H1 2022. The remaining c. EUR 1 billion of tracker mortgages are expected to be incorporated in 2024.

Earnings Combined Building Block (BB) Assessment: Good
AIB is well positioned to consolidate its improved earnings generation capacity on the back of higher interest rates, a low deposit beta in Ireland, its enlarged loan book, the less competitive environment in the Irish banking sector, as well as the resilient domestic economy.

AIB reported net attributable profit of EUR 854 million in H1 2023, 79% higher YoY driven by the significant increase in Net Interest Income (NII). The Bank’s Return on Equity (ROE), as calculated by DBRS, was 13.6% in H1 2023 and 5.9% in 2022. AIB’s NII rose by 98% YoY in H1 2023 as a result of higher interest rates on assets, a very low deposit beta and a larger loan book. DBRS Morningstar notes that NII could have peaked in 2023 as the Bank’s NII remains negatively sensitive to customer deposit beta increases, which are expected to be modest in the short term, and Minimum Regulatory Reserves placed in the ECB are no longer remunerated from September 2023 on. Yet, AIB has a large structural hedge in place to help mitigating these impacts and any fall in interest rates in the future.

AIB’s total operating expenses (including regulatory charges) increased by 3.6% YoY in H1 2023 mainly as a result of inflation and larger customer base including the Ulster Bank transactions. The underlying efficiency ratio (excluding non-recurring items) improved to 46% at end-H1 2023, down from 69% in H1 2022. Net cost of risk remained well contained at 26 basis points (bps) in H1 2023, up from 1 bps in 2022, reflecting the impact of higher interest rates and lower valuation of the Bank’s RE portfolio.

Risk Combined Building Block (BB) Assessment: Good/Moderate
AIB has an adequate risk profile after a substantial reduction in its stock of Non-Performing Loans (NPLs) through organic recovery and asset sales performed over the last decade. As a result, AIB’s NPL ratio stood at 3.4% at end-September 2023 compared to 34.9% of impaired loans at end-2013. Whilst DBRS Morningstar expects NPLs to increase in the short-to-medium term due to the high interest rates and challenging macroeconomic environment, the impact should be manageable given AIB’s improved revenue generation capacity.

AIB’s gross loan book was comprised of 48% residential mortgages, 32% non-RE business loans, 15% RE lending and 5% other household financing at end-H1 2023. NPLs grew by 4.6% in 9M 2023, reflecting the impact of higher interest rates, valuation declines and growth in its loan book. In addition, Stage 2 loans, which are exposures whose credit risk has significantly increased, rose by 37% since end-2022 to represent 13.2% of total gross loans at end-H1 2023, due to the reclassification of EUR 2.3 billion RE exposures from Stage 1 to Stage 2. The Group’s NPL ratio, however, remained stable due to the growth in the total portfolio.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
AIB's funding profile is sound, underpinned by its large and solid customer deposit base, which represented 92% of total non-equity funding at end-H1 2023, as customer deposits grew by 8.1% YoY to EUR 103.7 billion benefitting from the exit of Ulster Bank and KBC from the Irish banking market. The net loan-to-deposit (LTD) ratio stood at 59% at end-H1 2023, compared to 58% at end-2022. DBRS Morningstar expects this ratio to modestly increase in the short term driven by the integration of the Ulster Bank tracker mortgage portfolio.

The Bank issued a Social Senior Unsecured EUR 750 million bond in January 2023 to comply with MREL requirements. As a result, AIB’s total MREL ratio stood at 31.4% at end-H1 2023, ahead of its MREL regulatory requirement of 29.4% set for January 2024. The Bank’s regulatory funding and liquidity ratios remained strong with a liquidity coverage ratio (LCR) of 164% and a net stable funding ratio (NSFR) of 158% at end-H1 2023.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views AIB's capital position as robust underpinned by its sizeable capital cushions over minimum regulatory requirements despite its high risk weighted assets (RWAs) density as compared to most of the European peers. The Bank reported a transitional CET1 ratio of 16.5% at end-H1 2023, down from 17.9% at end-2022 as a result of higher RWAs due to the recognition of the Ulster Bank tracker mortgage loan portfolio as well as the recalibration of some IRB models, which translated into a capital cushion of 584 basis points. Nevertheless, minimum regulatory requirements are expected to increase by 90 bps in the short-term after the review of the Countercyclical Buffer (CCyB) by the Central Bank of Ireland as well as the increase of the UK CCyB which will still leave the bank with an ample capital cushion.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://www.dbrsmorningstar.com/research/425534.

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, AIB’s 2021 and 2022 Annual Reports, AIB’s H1 2022 and H1 2023 Interim Reports, AIB’s 2022 and H1 2023 Presentations, and AIB’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.

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 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/425533.

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

Lead Analyst: María Jesús Parra Chiclano, Vice President, Credit Ratings- Global FIG
Rating Committee Chair: William Schwartz – Senior Vice President, Credit Practices
Initial Rating Date: October 20, 2005
Last Rating Date: January 16, 2023

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