Bank of Ireland 'BB+/B' Ratings Affirmed On Stable Irish Banking Industry Risk; Outlook Remains Negative
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Research Update:
Bank of Ireland 'BB+/B' Ratings
Affirmed On Stable Irish Banking
Industry Risk; Outlook Remains
Negative
Primary Credit Analyst:
Nigel Greenwood, London (44) 20-7176-7211; nigel.greenwood@standardandpoors.com
Secondary Contacts:
Alexandre Birry, London (44) 20-7176-7108; alexandre.birry@standardandpoors.com
Dhruv Roy, London (44) 20-7176-6709; dhruv.roy@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Ratings Score Snapshot
Related Criteria And Research
Ratings List
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 10, 2014 1
1330975 | 301179249Research Update:
Bank of Ireland 'BB+/B' Ratings Affirmed On
Stable Irish Banking Industry Risk; Outlook
Remains Negative
Overview
• We consider that economic and industry risks, as they affect the Irish
banking system, remain high.
• In particular, we do not anticipate seeing meaningful improvement in the
very poor asset quality of Irish banks' loan books over the coming year,
and underlying income growth prospects appear modest.
• Despite our improving view of the creditworthiness of the Irish
sovereign, we continue to see a stable trend for Irish banking industry
risk.
• We are affirming our 'BB+/B' counterparty credit ratings on Bank of
Ireland.
• The negative outlook solely reflects the possible removal of the one
notch of potential extraordinary government support within the long-term
counterparty credit rating by year-end 2015.
Rating Action
On June 10, 2014, Standard & Poor's Ratings Services affirmed its 'BB+/B'
counterparty credit ratings on Bank of Ireland (BOI). The outlook is negative.
Rationale
The affirmation reflects our view that the Irish banking industry is making
slow, but steady, progress to improve its balance sheet profile and achieve
positive earnings after six years of balance-sheet instability and pretax
losses. As demonstrated by our recent rating action on Ireland, in which we
raised the long-term sovereign credit rating to 'A-' and maintained the
positive outlook, we consider that the Irish economy as a whole is recovering
more quickly than its banking sector.
We anticipate that Ireland will sustain its economic growth. Unemployment
levels are declining and property prices are increasing across Ireland.
However, household debt is still elevated, the stock of nonperforming assets
is significant, and we expect credit losses across most asset classes to
continue to dampen bank earnings over the next two years.
In our view, pre-provision operating income growth is likely to be modest
across the system this year and next because of limited underlying revenue
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1330975 | 301179249Research Update: Bank of Ireland 'BB+/B' Ratings Affirmed On Stable Irish Banking Industry Risk; Outlook
Remains Negative
growth (excluding the recovery in net interest margins that has arisen from
certain structural factors).
We recognize that systemwide funding risks have fallen, but the turnaround
remains incomplete. In our view, the Irish authorities could have more
actively forced banks to address the deficiencies in their capitalization that
were exposed by fully loaded Basel III metrics.
We would need to observe a better-than-expected reduction in both credit
losses and household debt, or stronger balance sheets, for us to reclassify
Ireland's banking system to a stronger BICRA group.
The starting point for our assessment of BOI's stand-alone credit profile
(SACP) remains stable, indicating a 'bb' anchor. In addition, we have not
changed our view of its other stand-alone credit factors.
We continue to consider that BOI has the strongest SACP of the five rated
banks that are active in the Irish retail market (the others being Allied
Irish Banks, KBC Bank Ireland, Permanent TSB, and Ulster Bank). In particular,
we are confident that BOI will report a statutory pretax profit for 2014
(following a statutory pretax loss of €525 million in 2013). We are
significantly less confident of seeing a return to profit in 2014 at BOI's
peers. This view mainly reflects BOI's improving net interest margin--BOI
reported that its first quarter 2014 net interest margin was about 2.05%,
which is better than peers. In our opinion, BOI has better asset quality than
its peers, but it is still a major drag on earnings. We assume BOI's total
loan-loss rate in 2014 will be just over 100 basis points; this compares to
our Irish systemwide domestic loans forecast of about 160 basis points in
2014.
We have therefore revised our projection for BOI's risk-adjusted capital (RAC)
ratio to 4.5%-5.0% by end-2015, from 4.0%-4.5%. In addition to our assumption
of better earnings, we also assume a 5% reduction in Standard & Poor's
risk-weighted assets in 2014 (from €115.7 billion on Dec. 31, 2013) and a
further 4% decline in 2015 because we assume that BOI's loan book will
continue to reduce, before growing again in 2016. That said, our capital and
earnings assessment for BOI remains unchanged at "weak" because we don't
expect its RAC ratio to comfortably exceed the 5% threshold that we ascribe to
a "moderate" assessment in the next 18 to 24 months. Our end-2013 RAC ratio
was a low 3.6%. This contrasts with BOI's reported estimated fully loaded CET1
ratio of 9.0%, or 6.3% excluding preference shares. The main difference
between the CET1 ratio excluding preference shares and our RAC ratio is that
we assign higher risk weightings for certain assets.
Outlook
The negative outlook indicates that we may lower the ratings on BOI by
year-end 2015 if we believe there is a greater likelihood that senior
unsecured liabilities may incur losses if the bank fails. Specifically, we may
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1330975 | 301179249Research Update: Bank of Ireland 'BB+/B' Ratings Affirmed On Stable Irish Banking Industry Risk; Outlook
Remains Negative
lower the long-term counterparty credit rating by one notch if we consider
that extraordinary government support is less predictable under the new EU
legislative framework.
We could revise the outlook back to stable if we consider that potential
extraordinary government support for BOI's senior unsecured creditors is
unchanged in practice, despite the introduction of bail-in powers and
international efforts to increase banks' resolvability; or if we believe that
other rating factors, such as a stronger SACP or a large buffer of
subordinated instruments, fully offset increased bail-in risks.
We could raise the SACP, and therefore potentially the ratings, if BOI
outperforms our expectations and achieves a RAC ratio comfortably above the 5%
threshold that we ascribe to a "moderate" capital and earnings assessment. We
do not currently expect to lower BOI's SACP but this could occur, for example,
if its earnings performance slips relative to Irish peers. We would reflect
this by lowering its business position to "adequate" from "strong."
Our ratings on the Irish sovereign have a positive outlook. Under our
criteria, if we raised these ratings by one notch to 'A' then BOI, as a highly
systemically important bank, would be eligible for two notches of
extraordinary government support, rather than the current one. Given that
there is at least a one-in-three probability that we could potentially be
removing all government support notches on systemically important banks within
18 months, we do not currently expect to raise the ratings on BOI in this
scenario. Instead, we would apply a negative adjustment of one notch to the
counterparty rating.
Ratings Score Snapshot
Issuer Credit Rating BB+/Negative/B
SACP bb
Anchor bb
Business Position Strong (1)
Capital and Earnings Weak (-1)*
Risk Position Adequate (0)
Funding and Liquidity Average and Adequate (0)
Support +1
GRE Support 0
Group Support 0
Sovereign Support +1
Additional Factors 0
*When a bank's anchor SACP, derived from our BICRA methodology, is in the 'bb'
category and its common equity regulatory Tier 1 ratio is greater than the
local regulatory requirements, a "weak" assessment of capital and earnings
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1330975 | 301179249Research Update: Bank of Ireland 'BB+/B' Ratings Affirmed On Stable Irish Banking Industry Risk; Outlook
Remains Negative
modifies the SACP downward by one notch (see paragraph 88 of our bank
criteria).
Related Criteria And Research
Related Criteria
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011
• Banking Industry Country Risk Assessment Methodology And Assumptions,
Nov. 9, 2011
• Bank Capital Methodology And Assumptions, Dec. 6, 2010
• Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
Related Research
• Most Irish Bank Ratings Affirmed On Stable Banking Industry Trends, June
10, 2014
• Banking Industry Country Risk Assessment: Ireland, June 10, 2014
• Ireland Upgraded To 'A-' On Improved Domestic Prospects; Outlook Positive,
June 6, 2014
• Standard & Poor's Takes Various Rating Actions On European Banks
Following Government Support Review, April 29, 2014
Ratings List
Ratings Affirmed
Bank of Ireland
Counterparty Credit Rating BB+/Negative/B
Certificate Of Deposit BB+/B
Senior Unsecured BB+
Subordinated B
Preference Stock B-
Commercial Paper B
Bank of Ireland U.K. Holdings PLC
Junior Subordinated* B-
*Guaranteed by Bank of Ireland.
Additional Contact:
Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com
Complete ratings information is available to subscribers of RatingsDirect at
www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by
this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column. Alternatively, call one of the following Standard & Poor's numbers:
Client Support Europe (44) 20-7176-7176; London Press Office (44)
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1330975 | 301179249Research Update: Bank of Ireland 'BB+/B' Ratings Affirmed On Stable Irish Banking Industry Risk; Outlook
Remains Negative
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm
(46) 8-440-5914; or Moscow 7 (495) 783-4009.
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1330975 | 301179249Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved.
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