Morningstar DBRS Changes Trends on Bank of Ireland'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 The Governor and Company of the Bank of Ireland (Bank of Ireland, BOI or the Bank), including its Long-Term Issuer Rating at A (low) and Short-Term Issuer Rating at R-1 (low). Morningstar DBRS also changed the trends on the Bank's long-term credit ratings to Positive from Stable, while the trends on all short-term credit ratings are Stable. The Bank's Intrinsic Assessment is A (low), and its Support Assessment is SA3. The full list of credit ratings is available at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The trend change to Positive from Stable reflects the Bank's improved profitability over recent quarters and Morningstar DBRS' view that BOI is positioned to continue reporting solid results on the back of a higher than pre-2022 interest rate environment; the Bank's structural hedge programme, and strong credit growth; especially in mortgages.

BOI's credit ratings also consider its leading domestic franchise, with dominant market shares in mortgages and business loans; its solid capitalisation levels, with comfortable cushions over minimum regulatory requirements; and its enhanced asset quality, especially since YE2021, largely through portfolio sales.

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. However, the trend would return to Stable if the Bank's profitability materially declines, including the impact from significant provisions to cover risk shortcomings, and/or if asset quality substantially deteriorates.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong/Good
BOI is the largest bank in the Republic of Ireland (ROI) with total consolidated assets of EUR 159 billion at the end of June 2024. It has a dominant domestic franchise in ROI, with leading market shares for new mortgage lending of 41% and solid market shares for corporates and wealth and insurance segments, and a smaller franchise in the UK in motor finance business, small and medium-size enterprises, and high-margin mortgages. Following the exit of KBC Bank Ireland (KBC) from the Irish banking sector, BOI acquired in 2022 a portfolio of around EUR 8.0 billion in loans, mostly mortgages, which increased the Bank's gross loans by 12% compared with YE2022. BOI completed the integration of the portfolio in 2023.

Earnings Combined Building Block (BB) Assessment: Good
BOI's profitability has improved since YE2022, supported by the higher interest rate environment, enlarged business footprint after the acquisition of KBC's portfolios, credit growth supported by a resilient domestic economy, and a more concentrated market following the exit of Ulster Bank Ireland DAC and KBC from the Irish banking sector. The Bank reported a net attributable profit of EUR 877 million in H1 2024, up 2.8% year over year, driven by a solid net interest margin, credit growth, higher revenues from fees and commissions and trading income, and far lower loan loss provisions. As a result, the Bank's return on equity (as calculated by Morningstar DBRS), increased to 13.9% in H1 2024 compared with 13.3% in 2023 and 7.5% in 2022. BOI also reported a solid efficiency ratio (as calculated by Morningstar DBRS; excluding nonrecurring items and including banking levies) of 49% and a low net cost of risk of 12 basis points (bps) in H1 2024.

Risk Combined Building Block (BB) Assessment: Good/Moderate
Morningstar DBRS views BOI's risk profile as adequate. The Bank's asset quality metrics improved in the first six months of 2024 as nonperforming loans (NPLs) declined by 3.6%, mostly driven by residential mortgages and large corporate loans, and Stage 2 loans (exposures whose credit risk has significantly increased), also reduced by 12.8%. As a result, BOI's NPL ratio stood at 2.9% at the end of June 2024 compared with 3.1% at YE2023. Morningstar DBRS also notes that the Bank's NPL portfolio is adequately provisioned with a total coverage ratio 52% at the end of June 2024, which resulted in a net NPL ratio of 1.4%.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
BOI's funding profile is robust and supported by a large customer deposit base, which represented 88% of total non-equity funding at the end of June 2024. As a result, BOI's net loan-to-deposit ratio (as calculated by Morningstar DBRS) was 81% at the end of June 2024. The Bank's liquidity profile is also adequate, with total liquid assets at the end of June 2024 representing approximately 0.8 times total customer deposits not covered by the Irish Deposit Guarantee Scheme and wholesale funding maturities up to one year. BOI reported a solid coverage ratio of 199% and a net stable funding ratio of 153% at the end of June 2024.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
BOI's capital position is solid, underpinned by a comfortable capital cushion over minimum regulatory requirements and its improved internal capital generation capacity. The Bank reported a pro forma fully loaded CET1 capital ratio (including H1 2024 net results) of 15.4% at the end of June 2024, resulting in a pro forma CET1 capital cushion over minimum regulatory requirements of 407 bps, which Morningstar DBRS views as strong especially when considering the high risk-weighted asset density Irish banks have compared with their European peers.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/444987.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.

Morningstar DBRS views that the Product Governance ESG subfactor was relevant to the credit rating. This is included in the Social category. In October 2024, the UK Court of Appeal ruled in favour of three customers regarding undisclosed broker commissions paid to car dealerships for arranging auto loans. The ruling rose concerns about disclosure standards for auto lenders and may lead auto lenders to take proactive steps to ensure transparency. Failure to do might expose auto lenders to legal and reputational risks and may erode public trust. Although, the potential economic impact is still unclear, it could include fines, redress and administration expenses. Morningstar DBRS notices that BOI's overall exposure to this segment was low with GBP 2 billion at end-June 2024 (2.9% of total gross loans). However, due to the large range of potential sanctions, overall final economic impact could be meaningful for the Bank. As a result, this risk is incorporated in the Bank's Risk grid grades.

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, BOI's presentations and interim management statements, BOI's annual and semiannual reports (2019-H1 2024), BOI ESG Investor Presentation 2023, 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/444986.

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: 6 September 2005
Last Rating Date: 15 January 2024
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