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

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit 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 credit ratings remains Stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) is A (low). See the full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The confirmation of BOI’s credit ratings takes into account the Bank’s improved profitability on the back of higher interest rates, low deposit beta, an enlarged lending book and the positive business momentum following the exit of Ulster Bank Ireland DAC (Ulster Bank) and KBC Bank Ireland (KBC) from the Irish banking sector. Morningstar DBRS expects that this improvement should be largely sustained going forward supported by the Bank’s strengthened and robust franchise in the Republic of Ireland in the retail, corporate and wealth and insurance segments.

BOI’s credit ratings also reflect the Bank’s moderate risk profile and the fact that asset quality is one of the main challenges for the Bank as it is showing signs of deterioration due to the unstable global macroeconomic environment. In addition, BOI’s Non-Performing Loan (NPL) ratio remains above the average of the European Banking sector of 1.8% at end-June 2023 as per the European Banking Authority dashboard. The confirmation of the credit ratings also considers the Bank’s strong funding profile, supported by its large and resilient customer base, as well as its solid capital position, underpinned by ample capital cushions over regulatory minimum requirements.

CREDIT RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require a further enhancement in asset quality while maintaining current profitability and capitalization levels.

A downgrade of the Long-Term Issuer Rating would happen if the Bank’s asset quality deteriorates significantly resulting in a material reduction in its capital buffers.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong/Good
BOI is the largest bank by assets in the Republic of Ireland with leading market shares in mortgages and businesses as well as wealth and insurance segments. The Bank also has a smaller franchise in consumer finance, Small and Mediums Enterprises (SMEs) lending and high-margin mortgages in the United Kingdom (UK).

Following the exit of KBC and Ulster Bank from the Irish banking sector, BOI acquired a portfolio of c. EUR 7.9 billion mortgage loans, c. EUR 0.1 billion commercial and consumer loans as well as EUR 1.8 billion deposits from KBC, fully migrated in February 2023. The transaction has increased the Bank’s gross loans by 12% since end-2022.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
BOI’s current profitability has benefitted from the improved revenue generation capacity due to the higher net interest margin (NIM) and the enlarged loan book, as well as the Bank’s focus on efficiency and strategic cost reduction. Morningstar DBRS expects this enhanced profitability to remain going forward on the back of higher interest rate environment with low deposit beta and the less competitive environment in the Irish banking sector, although some pressures will likely continue to arise from the increasing cost of risk due to the still challenging global economic outlook and higher borrowing costs for customers.

BOI reported net attributable profit of EUR 853 million in H1 2023, up 191% YoY, driven by the large increase in net interest income (NII), partially offset by higher loan loss provisions (LLPs). The Bank’s Return on Equity (ROE), as calculated by Morningstar DBRS, was 14.4% in H1 2023 versus 7.8% in 2022. BOI’s NII was up 67% YoY in H1 2023 driven by the higher interest rates on the asset side, which translated into a NIM of 2.96% compared to 1.73% in H1 2022. The acquired KBC portfolios contributed 10% of the total NII growth YoY. BOI’s LLPs totaled EUR 161 million in H1 2023, 3.6x higher YoY mostly related to the corporate and real estate portfolios as well as model updates to incorporate the impact of higher interest rates and inflation into the consumer and residential lending books. The net cost of risk increased to 42 basis points (bps) compared to 26 bps in FY22 and 12bps in H1 2022.

Risk Combined Building Block (BB) Assessment: Good/Moderate
BOI’s risk profile is moderate and asset quality remains a key challenge for the Bank, specially as asset quality deterioration is increasing due to the challenging global macroeconomic environment and the Bank’s NPL ratio remains moderately high at 3.6% at end-June 2023. Nevertheless Morningstar DBRS expects the impact from rising NPLs to be manageable from a profitability perspective given BOI’s improved revenue generation capacity.

NPLs grew by 12% in H1 2023 to EUR 2,939 million largely driven by the credit deterioration in residential and real estate exposures reflecting the impact of higher interest rates, valuation declines and inflation on the loan book, and to a lesser extent, the acquisition of EUR 77 million POCI mortgages within the KBC residential mortgage portfolio. In addition, Stage 2 loans, which are exposures whose credit risk has significantly increased, rose by 10% in H1 2023 and accounted for 16.9% of total gross loans, with specific segments like RE, Corporates and Irish SMEs where 42%, 26% and 20% of their respective total exposures were classified as Stage 2 at end-June 2023.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
BOI's funding profile is robust, supported by a diversified and growing customer deposit base, as the Bank has consistently grown its deposit base since 2017 to account for 88% of its total non-equity funding at end-H1 2023, as well as an adequate funding mix. As a result and despite the enlarged loan book, the Bank’s net loan-to-deposit (LTD) ratio remained robust at 79% at end-H1 2023, compared to 73% at end-2022.

The Bank has recurrent access to the wholesale markets and issued three series of EUR 750 million Senior Unsecured bonds in January, July and November 2023 to comply with MREL requirements, set at 20.95% of its Risk Weighted Assets (RWAs) in 2023, while BOI reported an MREL ratio of 30.7% at end-June 2023. The Bank’s regulatory funding and liquidity ratios remained strong with a liquidity coverage ratio (LCR) of 193% and a net stable funding ratio (NSFR) of 153% at end-H1 2023.

Capitalisation Combined Building Block (BB) Assessment: Good
BOI's capital position is solid, with comfortable capital buffers over minimum regulatory requirements. The Bank reported a transitional CET1 ratio of 15% at end-H1 2023, down from 15.6% at end-2022 largely driven by the increase in RWAs after the integration of the KBC portfolios and a foreseeable dividend deduction, which translated into a capital cushion of 405 basis points. Although, minimum regulatory requirements are expected to increase by 36 bps in 2024 after the small increase in the Pillar 2 requirement as well as the review of the Countercyclical Buffer (CCyB) by the Bank of England and the CCyB by the Central Bank of Ireland, we believe the Bank should maintain an ample capital cushion as its target CET1 capital ratio is above 14%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/426473/.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS 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://dbrs.morningstar.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://dbrs.morningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (22 June 2023). In addition Morningstar DBRS uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.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://dbrs.morningstar.com/about/methodologies

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

Morningstar DBRS 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

Morningstar DBRS 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. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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://dbrs.morningstar.com/research/426472/.

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: Elisabeth Rudman – Managing Director, Head of Global FIG
Initial Rating Date: September 6, 2005
Last Rating Date: January 18, 2023

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