Morningstar DBRS Changes Trends on AIB's Long-Term Credit Ratings to Positive from Stable; Confirms Long-Term Credit Ratings at A (low)

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on Allied Irish Banks Plc (AIB or the Bank), including the Bank's Long-Term Issuer Rating at A (low) and the Short-Term Issuer Rating at R-1 (low). Morningstar DBRS also changed the trends on all long-term credit ratings to Positive from Stable while the trends on all short-term credit ratings remain Stable. The Bank's Intrinsic Assessment is A (low), and its Support Assessment is SA3. See the full list of credit ratings at the end of this press.

KEY CREDIT RATING CONSIDERATIONS
The trend change to Positive from Stable reflects the Bank's significantly improved profitability over the recent quarters. Morningstar DBRS' view that AIB is positioned to sustain this improvement on the back of a higher than pre-2022 interest rate environment, low funding costs underpinned by its large customer deposit base, the Bank's structural hedge programme in place, as well as strong credit growth, especially in mortgages, and in the climate capital related industry in the medium-term. The trend change also considers the Bank's enhanced asset quality underpinned by its active balance sheet de-risking and the strong provisioning effort the Bank performed during the last decade, despite some deterioration in NPLs in recent quarters as higher interest rate environment pressures borrowers.

AIB's credit ratings also consider its strong domestic franchise, with substantial market shares in mortgages, business loans, and credit cards; its solid capitalisation levels supported by ample cushions over minimum regulatory requirements and improved internal capital generation; as well as its strong funding profile on the back of its large and stable customer deposit base.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require the Bank to sustain a record of solid profitability whilst maintaining its risk profile and capital levels.

Given the Positive trend, a downgrade of the credit ratings is unlikely. The trend would return to Stable if the Bank is unable to sustain the recent levels of profitability over the short to medium term and/or its asset quality materially deteriorates.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Good
AIB is the Republic of Ireland's (RoI) second-largest bank with total consolidated assets of EUR 137 billion as at end-June 2024. It provides universal banking services to individuals, small and medium enterprises, and corporates in the RoI, and to a lesser extent corporate banking in Great Britain and retail and business activities in Northern Ireland. The Bank had a robust domestic market share of 36.4% in new mortgages at end-September 2024. The Irish government, albeit actively reducing its stake, remains a shareholder in AIB with a 20.0% stake at end-November 2024, down from 40.8% at end-2023. Following the exit of Ulster Bank Ireland DAC (Ulster Bank) from the Irish banking sector at end-2022, AIB acquired a total loan portfolio of c. EUR 7.7 billion (c. 40% corporate loans and 60% mortgages) from Ulster Bank, with the migration finalised in September 2024.

Earnings Combined Building Block Assessment: Good
AIB's profitability has significantly benefitted from the higher interest rate environment since end-2022 , its increased business footprint post the acquisition of the Ulster Bank portfolio, credit growth supported by a resilient domestic economy, and a more concentrated market following the exit of Ulster Bank and KBC Bank Ireland from the Irish banking sector. The Bank reported a net attributable profit of EUR 1.1 billion in H1 2024, up 30% YoY, mainly driven by an increase in net interest income because of an efficient management of the net interest margin as well as a larger lending book because of inorganic and organic growth. As a result, the Bank's return on equity, as calculated by Morningstar DBRS, increased to 15.1% in H1 2024 from 5.9% in 2022. AIB also reported a strong efficiency ratio (as calculated by Morningstar DBRS, excluding non-recurring items and including banking levies) of 44% and a low net cost of risk of 18 basis points (bps) in H1 2024.

Risk Combined Building Block Assessment: Good/Moderate
Morningstar DBRS views AIB's risk profile as adequate. The Bank reported an increase of 12.0% in NPLs in the first six months of 2024 driven by the impact of higher interest rates across its loan book as well as the increased business portfolio. As a result, the Bank's NPL ratio rose to 3.2% at end-June 2024 from 3.0% at end-2023. However, the Bank's NPL portfolio is well-provisioned with a total coverage ratio of 71% at end-June 2024, as calculated by Morningstar DBRS, which resulted in a net NPL ratio of 1.0%, in line with the European banking sector's average, according to the Q2 2024 European Banking Authority dashboard.

Funding and Liquidity Combined Building Block Assessment: Strong
The Bank's funding profile is robust, underpinned by its large and resilient retail customer deposit base, which represented 91% of total non-equity funding at end-June 2024. As a result, AIB's net loan-to-deposit ratio (as calculated by Morningstar DBRS) was a low 63% at end-June 2024. The Bank's liquidity profile is also solid with ample total available qualifying liquid assets at end-June 2024 that represented 1.1x of total customer deposits not covered by the Irish Deposit Guarantee Scheme and liability maturities of up to two-and-a-half years. AIB reported a strong liquidity coverage ratio of 204% and a net stable funding ratio of 163% at end-June 2024.

Capitalisation Combined Building Block Assessment: Good
AIB's capital position is strong, underpinned by a large capital cushion over minimum regulatory requirements, a significantly improved internal capital generation capacity, as well as its flexibility to access the market to reinforce its capital position. In this regard, the Bank issued EUR 625 million of AT1 notes and EUR 650 million of Tier 2 notes in the first six months of 2024. The Bank reported a fully loaded CET1 capital ratio of 15.8% at end-September 2024, flat since end-2023, since capital generation was offset by shareholders' distributions and higher RWAs The Bank maintained a CET1 capital cushion over minimum regulatory requirements of 441 bps, which Morningstar DBRS views as strong when considering the high RWA density Irish banks have when compared to their European peers.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/444761/.

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.

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, AIB's presentations, AIB'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://dbrs.morningstar.com/research/444762/.

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: William Schwartz, Senior Vice President - Global Fundamental Ratings, Credit Practices
Initial Rating Date: 20 October 2005
Last Rating Date: 19 December 2023

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