Morningstar DBRS Upgrades PTSB's Long-Term Issuer Rating to BBB, Revises Trend to Stable from Positive

DBRS Ratings GmbH (Morningstar DBRS) upgraded the Long-Term Issuer Rating of permanent tsb p.l.c (the Bank or PTSB) to BBB from BBB (low) and its Short-Term Issuer Rating to R-2 (high) from R-2 (middle). Morningstar DBRS also upgraded the Long-Term Issuer Rating of Permanent TSB Group Holdings plc (PTSBG or the Group), the top-level holding company, to BBB (low) from BB (high) and its Short-Term Issuer Rating to R-2 (middle) from R-3. The trends on all long-term credit ratings have been revised to Stable from Positive. The Bank's Intrinsic Assessment (IA) is BBB and the Support Assessment remains at SA1. The Group's Support Assessment is SA3. See the full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The upgrade of PTSB and PTSBG's Long-Term Issuer Ratings reflects the Group's improved profitability over the recent quarters and Morningstar DBRS' view that PTSBG should largely sustain this enhancement in profitability over the long term on the back of its enlarged loan book thanks to its acquisition of Ulster Bank Ireland DAC's (Ulster Bank) portfolios, the higher than pre-2022 interest rate environment, credit growth, and moderate cost of risk. In addition, Morningstar DBRS also expects PTSBG to progressively reduce its operating cost base as the Group realises efficiencies from its strategic and digital projects and as it streamlines its workforce following the integration of Ulster Bank's portfolios.

The credit rating actions also take into account the substantial reduction in non-performing loans (NPLs) since end-2016 and especially this year, as once PTSBG completes the sale of its Glas III portfolio, which is expected in Q4 2024, it will report significantly better NPL ratios than its domestic retail peers and slightly better than the average for the European banks.

PTSBG's credit ratings also consider its solid capitalisation levels supported by ample cushions over minimum regulatory requirements and improved internal capital generation.

CREDIT RATING DRIVERS
A credit rating upgrade would be contingent on the Group substantially enhancing its profitability by materially reducing its operating cost base whilst maintaining its risk profile and capital levels.

A credit rating downgrade would be driven by the inability of the Group to increase profitability in the short term or if its asset quality metrics or capital ratios deteriorate materially.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Good/Moderate
PTSBG is the third retail banking group in the Republic of Ireland with total assets of EUR 29 billion at end-June 2024. It mainly provides traditional retail banking to households, where the Group had a market share of 16.3% in residential mortgages at end-September 2024. In addition, it also has a small but growing franchise for small and medium-size enterprises (SMEs) and asset finance business. The Irish government is PTSBG's main shareholder, with a 57.4% stake at end-June 2024. In November 2022, the Group acquired a c. EUR 6.75 billion loan portfolio, largely mortgages, from Ulster Bank, which increased the size of the Group's loan book by c. 48% at end-2023 compared with end-June 2022 and helped diversify the Group's loan book. The integration of the loan portfolio concluded in July 2023.
Earnings Combined Building Block Assessment: Moderate/Weak
Profitability remains the key challenge for the Group as it remains weaker than similar Morningstar DBRS-rated peers. The Group reported a net profit of EUR 63 million in H1 2024, significantly up from EUR 25million, benefitting from no exceptional costs in H1 2024 and a loan loss reversal. However, excluding exceptional and non-recurrent items, PTSBG's underlying profit before tax was EUR 82 million in H1 2024 compared with EUR 86 million in H1 2023, as revenue growth and loan loss reversals did not offset the significant increase in operating costs of 20.1% YOY driven by employee growth, digital and strategic investments. As a result, the cost to income ratio weakened to 82 % in H1 2024 from the year before. The Group's total return on equity, as calculated by Morningstar DBRS, was 5.2% in H1 2024 compared with 2.1% in H1 2023 and 2.8% in 2023.

Risk Combined Building Block Assessment: Good
The Group's risk profile has improved significantly since end-2016 through asset sales, organic cure, strong provisioning efforts. In addition, the Bank has significantly improved its loan book mix over the years and has a significantly lower proportion of higher risk buy-to-let mortgages. In July 2024, the Group signed the sale agreement of a NPL portfolio of c. EUR 341 million (Glas III), which will bring the proforma NPL ratio as of end-June 2024 down to 1.7% from the actual 3.3%. The sale is expected to materialise in Q4 2024. The Group reported a Stage 2 loan of 8.5% at end-June 2024, below the average of significant institution banks in Europe of 9.5% at end-June 2024, according to the European Central Bank, as well as a strong NPL coverage ratio of 113%.

Funding and Liquidity Combined Building Block Assessment: Good
The Group's funding profile is good, underpinned by its large and resilient retail customer deposit base, of which c. 70% was covered by the Irish Deposit Guarantee Scheme (DGS) at end-June 2024. As a result, at end-June 2024, customer deposits were PTSBG's largest source of funding, accounting for 89% of its total non-equity funding and its net loan-to-deposit ratio (as calculated by Morningstar DBRS) improved to 87% from 92% at end-2023. The Group's liquidity profile is solid with ample high-quality liquid assets at end-June 2024 that represented 1.2x of total customer deposits not covered by the DGS and debt maturities of up to one year. In addition, PTSBG reported a strong liquidity coverage ratio of 232% and a net stable funding ratio of 166% at end-June 2024.

Capitalisation Combined Building Block Assessment: Good/Moderate
PTSBG's capital position at end-June 2024 was solid, supported by ample cushions over minimum requirements and improved internal capital generation. The Group reported a regulatory Common Equity Tier 1 (CET1) capital ratio of 14.5% at end-June 2024, up 20 bps since end-2023. However, considering the completion of the Glas III transaction, the proforma CET1 capital ratio at end-June 2024 was 14.9%, which translates into a capital cushion over the minimum regulatory requirement of 452 bps. Finally, the Group's MREL ratio stood at 35.2% at end-June 2024, above the minimum requirement of 24.6%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/444072.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

Morningstar DBRS notes that this press release was amended on 3 December 2024 to incorporate the solicitation status disclosure.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 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 these credit ratings include Morningstar Inc. and company documents, PTSBG's presentations, PTSBG's annual and semiannual reports (2019-H1 2024), European Banking Authority data and European Central Bank data. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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

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' 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://www.dbrsmorningstar.com/research/444071.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: María Jesús Parra Chiclano, Vice President - European Financial Institution Ratings
Rating Committee Chair: Elisabeth Rudman - Managing Director - Global Financial Institution Ratings
Initial Rating Date: 27 October 2009
Last Rating Date: 4 December 2023
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