Irish Banks' Recovery Phase Draws To A Close - Anastasia Turdyeva Letizia Conversano Simon Daly Patrick Drury Byrne - S&P Global Ratings
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Irish Banks’ Recovery Anastasia Turdyeva
Letizia Conversano
Phase Draws To A Close Simon Daly
Patrick Drury Byrne
May 15, 2019Key Takeaways
Irish banks demonstrate stability despite internal and external challenges.
– Irish banks' credit profiles have improved materially in recent years, as they benefitted
from supportive economic conditions. This puts them in a stronger position to absorb
future shocks, such as Brexit.
– In 2019, we expect nonperforming assets (NPAs) to continue to reduce and near-term
profitability and domestic return on equity (ROE) to remain stable, although below the
European average.
– Future near-term upgrades to Irish banks are most likely to be based on improved
additional loss-absorbing capacity (ALAC).
2Back On Track
What to watch in 2019:
– NPAs will likely continue to reduce in 2019, given the regulatory pressure to reduce the
ratio of problem loans and the existence of a market for portfolio sales. Bank of Ireland
and Allied Irish Banks, the two "pillar" banks, are the most advanced in this process.
– We will monitor the quality of the loan book, which is typically weaker than in many other
EU countries due to the concentration in real estate and popularity of tracker mortgages.
Previously, reversal of provisions has supported profits; this is unlikely to continue.
– We see limited prospects for expanding net interest margins (NIMs) further, given the
competitive market dynamics, low interest rates, and gradual build up in banks’ stock of
MREL (minimum requirements for own funds and eligible liabilities), which will weigh on
the future cost of funding.
– Raising the currently modest proportion of fees and commissions in the mix is critical for
Irish banks to offset interest margin pressure, especially for non-pillar banks.
– Capitalization remains at relatively strong levels, but is set to decline marginally as loan
books expand and dividend distribution policies are unlikely to change.
– Banks have full access to capital markets and are on track with their planned issuance
of MREL-eligible instruments.
3Most Rated Banks Carry A Stable Outlook
Near-Term Upgrades Will Depend On Improved ALAC Or, To a Lesser Extent, Asset Quality
Sources of support in Irish bank ratings
SACP / UGCP* ALAC Support Group Support
Anchor Ireland Sovereign Rating Outlook†
– Bank of Ireland Group PLC (BoI)
has demonstrated a superior
AA-
track record on asset quality
A+
A
compared with domestic peers.
A-
The positive outlook indicates
S P P
BBB+ S
that we may align the rating on
BBB
BoI with the higher ratings on its
BBB- S
international peers
BB+ – Our positive outlook on Ulster
BB Bank DAC, by contrast, reflects
BB- that on its parent company, the
B+ Royal Bank of Scotland.
B
B-
AIB Group PLC* Bank of Ireland Group Ulster Bank§ KBC Ireland§ Permanent TSB*
PLC*
SACP--Stand-alone credit profile. UGCP--Unsupported group credit profile. ALAC--Additional loss-absorbing capacity. *In case of AIB, BOI, and PTSB, we consider
the UGCP. §In the case of Ulster and KBC Ireland, we consider the SACP. †Outlook: S--Stable, P--Positive. All ratings relate to the main operating bank. Ratings as of
May 8, 2019. Source: S&P Global Ratings.
4Irish Economy Continues To Perform Strongly
2016A 2017A 2018A 2019F 2020F 2021F
Economic indicators (%)
GDP per capita (000s $) 64.0 69.4 77.5 80.1 87.2 91.8
Real GDP growth % 5.0 7.2 6.0 3.8 3.0 3.0
Real GDP per capita growth % 3.9 5.9 4.7 2.6 1.8 1.8
Real fixed investment growth % 51.7 (31.0) 10.0 2.0 3.0 3.0
Real exports growth % 4.4 7.8 3.2 4.4 3.6 3.6
Unemployment rate 7.2 5.7 5.8 5.2 5.0 4.5
External indicators (%)
Current account balance/GDP (4.2) 8.5 12.5 12.3 11.4 10.8
Current account balance/CARs (2.8) 5.7 8.3 8.2 7.8 7.4
CARs/GDP 147.5 148.2 150.8 149.6 146.2 146.1
Trade balance/GDP 38.8 36.6 35.5 35.3 35.0 34.7
Net FDI/GDP 3.1 11.4 3.0 2.0 2.0 2.0
Gross external financing needs/CARs plus usable reserves 374.0 331.3 318.8 314.0 302.0 293.8
Fiscal indicators (%, general government)
Balance/GDP (0.5) (0.2) (0.2) (0.5) (0.7) (0.7)
Monetary indicators (%)
CPI inflation growth % (0.2 0.3 0.7 1.4 1.6 1.8
Exchange rate, year-end (€/$) 1.0 0.8 0.9 0.8 0.8 0.8
Banks' claims on resident non-gov't sector growth (5.0) (3.3) 1.0 2.0 3.0 3.0
A--Actual. F--Forecast. Data and projections are from “Ireland 'A+/A-1' Ratings Affirmed; Outlook Remains Stable,” Nov. 30, 2018.
Source: S&P Global Ratings database and ratio definitions.
5Continued House Price Inflation, But No Imbalances
Demographics Support Economic Activity, …Which Itself Supports Collateral Values
Banks’ Future Revenues, And Rising House And Facilitates Banks’ Portfolio Sales
Prices…
Components of the annual population Residential property price index
change, 1987-2018 National - all residential properties
National excluding Dublin - all residential properties
Natural increase Net migration Population change Dublin - all residential properties
150 160
125 140
100 120
75 100
Thou.
50 80
%
25 60
0 40
(25) 20
(50) 0
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Sep-08
Aug-09
Jan-05
Oct-07
May-12
Oct-18
Dec-05
Jun-11
Apr-13
Mar-14
Feb-15
Jan-16
Jul-10
Dec-16
Nov-06
Nov-17
Source: Central Statistics Office, S&P Global Ratings. Source: Central Statistics Office, S&P Global Ratings.
6The Big Two Irish Banks Perform Better Than Peers
(Mil. €) BoI Group PLC AIB Group PLC Ulster Bank Ireland PTSB Group PLC
Total assets 123,669 91,536 29,538 21,810
% change versus 2017 0.9 1.6 (2.3) (4.2)
Operating revenues 2,833 2,765 716 442
% change versus 2017 (5.8) (6.0) 17.8 (0.5)
Noninterest expenses 1,945 1,581 520 351
% change versus 2017 (6.7) 0.4 5.9 6.4
Preprovision operating income 888 1,184 196 91
Pretax profit 835 1,247 99 3
RoTE (Statutory) (%) * 8.5 12.4 1.7 0.2
Net interest income/average earning assets (%) 2.26 2.61 1.68 1.69
Noninterest expenses/operating revenues (%) 68.7 57.2 72.6 79.4
New loan loss provisions/average customer loans (%) (0.05) (0.32) 0.10 0.09
Stage 3 loans/total loans (%) 5.8 9.2 11.8 10.0
Stage 3 ECL allowance/Stage 3 gross loans (%) 31.5 27.6 27.6 37.6
Customer loans (net)/customer deposits (%) 96.9 89.9 103.6 93.3
Source: Financial summaries as of year-end 2018. ECL--Expected credit losses. RoTE--Return on tangible equity. *For BOI Group and AIB Group, ROTE as reported.
For Ulster and PTSB Group, ROTE estimated as Net Income on S&P Global Ratings’ Tangible Common Equity. Data as of December 2018. Source: S&P Global
Ratings database and ratio definitions.
7Improving Profitability Further Remains A Challenge
We forecast no material improvement in earnings over 2019:
- Limited revenue diversification, especially for non-pillar banks, is a weakness as interest rates are low.
- Cost bases are high, given current revenues, and banks are investing further in the race to digitalization.
- Reversal in provisions is unlikely to further support bottom-line earnings.
Irish Banks’ Net Income Breakdown And ROE Evolution Over Time, 2013-2019F
NII Other income Noninterest expenses LLPs Extraordinary items (net) Taxes ROE (right scale)
10 30
5 15
0 0
Bil. €
-5 -15
%
-10 -30
-15 -45
-20 -60
2013A 2014A 2015A 2016A 2017A 2018A 2019F
NII--Net interest income. LLP--Loan loss provisions. ROE--Return on equity. A--Actual. F--Forecast. Data is based on five-bank aggregate (BOI Group, AIB Group,
PTSB Group, Ulster, and KBC Ire). Values as of year-end 2019 are S&P Global Ratings projections. ROE is calculated as reported net income before minority interest
on two-years average S&P Global Ratings adjusted common equity. Source: S&P Global Ratings database and ratio definitions.
8Profitability In A European Context
– Profitability at BoI and AIB is close to the European average, thanks to their pricing power, business
diversity, and scale.
– Other Irish banks struggle to generate sufficient returns.
Top 50 Banks 2019 Forecast Return On Average Common Equity
20
15 Selected Irish Banking
Group
Selected Irish Banking
Group
10
Irish Banking System
5
%
0
-5
-10
Note: The chart includes top 50 banks in terms of assets. Data as of end-2019 (projection). Source: S&P Global Ratings database and projections. Return on average
common equity is calculated as projected net income in 2019, over average common shareholders’ equity.
9Strong Net Interest Margins, But Under Pressure
– Reported NIMs increased until 2017, mainly due to a sharp reduction in the cost of funds,
but have since started to decline marginally.
– There is little scope for the costs of funds to reduce further in 2019, especially as the
gradual build-up of MREL stock will place further pressure on margins.
– However, asset spreads on new mortgage and other lending are still higher than the
eurozone average. This supports the current healthy NIMs. Gradual reduction of low-yield
tracker mortgages (which comprise about 40% of systemwide mortgages), to be replaced
with higher-yielding mortgages, will benefit the NIM and temporarily offset the negative
effect of low interest rates. In the long run, we do not see this price differential compared
with other EU countries as sustainable.
– Therefore, and as competition for new business, especially new mortgage lending, is
intensifying, asset spreads may slip. Due to Brexit-related uncertainties, new lending
prospects to SMEs are muted. Therefore, and overall, we expect NIMs to diminish
gradually in 2019 and 2020.
10Competition For New Business Is Heating Up
Net Interest Income Components And Trend, Evolution In Interest Rates On New Lending, By
2013-2018 Different Asset Classes
Loans Securities Other assets House Purchases, over 1 year fixation
Deposits Other liabilities NII Personal Loans, over 1 year fixation
Non-financial corporations, loans up to €1 mil.
10 Non-financial corporations, loans over €1 mil.
9 12
8
7 10
6
8
Bil. €
5
4
6
%
3
2
4
1
0
2
Income
Income
Income
Income
Income
Income
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
0
2013 2014 2015 2016 2017 2018 2004 2006 2008 2010 2012 2014 2016 2018
NII--Net interest income. Data is based on five-bank aggregate (PTSB Group, Source: Data from Central Bank of Ireland
Ulster, AIB Group, BOI Group, KBC Ire). Source: S&P Global Ratings database.
11Largest Banks Still Outperform The Rest
Net interest margin (NIM) trend: AIB has the strongest NIM; Ulster Bank and PTSB’s NIMs suffer from
still-large nonperforming assets
System average BOI Group AIB Group Ulster PTSB Group
3.0
2.5
2.0
1.5
%
1.0
0.5
0.0
2013 2014 2015 2016 2017 2018 2019F
F--Forecast. Values as of end-2019 are S&P Global Ratings projections. The value for the system average is based on a five-bank aggregate (PTSB Group, Ulster, AIB
Group, BOI Group, KBC Ire). Source: S&P Global Ratings database and ratio definitions.
12Restructuring Costs Eat Into Bank Performance
Irish banks' small market and the persistently low interest rates weigh on revenue. Costs cannot easily be
cut given the need to invest in systems and the customer proposition, and the banks’ substantial
restructuring costs. The average cost-to-income ratio among Irish banks is therefore about 70%, much
higher than other European banking systems.
Restructuring Costs And Impact On Irish Banks’ Pretax Cost-To-Income Ratio: European Comparison
Profit
Restructuring costs 90
Restructuring cost/pretax profit (right scale) 80
70
350 10 60
9 50
300 40
8
%
30
250 7 20
10
200 6 0
Mil. €
Italian Banking System
BOI Group
Portuguese Banking
Irish Banking System
AIB Group
Spanish Banking
PTSB Group
Ulster Bank
5 %
150 4
System
System
100 3
2
50
1
0 0
2014 2015 2016 2017 2018
Data is based on a five-bank aggregate (PTSB Group, Ulster, AIB Group, BOI Data for the Irish Banking System is based on a five-bank aggregate (PTSB
Group, KBC Ire). Source: S&P Global Ratings database and ratio definitions. Group, Ulster, AIB Group, BOI Group, KBC Ire) . Data as of Dec. 31, 2018.
Source: S&P Global Ratings databases and definition.
13The Deleveraging Years Are Almost Over
– The stock of NPAs is reducing thanks to the benign macroeconomic environment and an
open market for NPA portfolio disposals.
– As of December 2018, we calculate systemwide NPAs to be above 12% of outstanding
customer loans, down from over 35% at end-2014. The adoption of a new accounting
standard, International Financial Report Standard (IFRS) 9, with effect from Jan. 1, 2018,
has rendered historical data incompatible for comparison purposes. Irish banks
historically calculated nonperforming loans on a broad basis, which included impaired
loans, loans over 90 days past due, and performing forborne loans.
– The level of NPAs in 2018 compares well with some other European countries, such as
Italy and Portugal, but was higher than that in Spain. We expect the ratio to reduce
further, given that the European Central Bank (ECB) required Irish banks to reduce their
NPA ratio toward the eurozone norm of around 5% by end-2019 (based on the ECB’s
regulatory nonperforming exposure ratio).
14NPAs Will Further Reduce In 2019
Evolution Of Irish Banks’ NPA And Coverage Ratios, 2012-2018
% of which stage 3 loans NPA ratio Coverage ratio (right scale)
40 50
30 40
30
%
20
%
20
10 10
0 0
2012A 2013A 2014A 2015A 2016A 2017A 2018A
NPA--Nonperforming asset. A--Actual. Data is based on a five-bank aggregate (PTSB Group, Ulster, AIB Group, BOI Group, and KBC Ire). 2018 data are not fully
comparable with previous years, given the implementation of IFRS 9 accounting standards. As of December 2018, our definition of NPAs includes Stage 3 loans
and forborne performing. Data on NPAs before 2018 are based on IAS 39. Source: S&P Global Ratings database.
NPEs And Coverage Ratios: European Comparison
NPE ratio Cost of risk (right scale)
50 1,500
40 1,200
30 900
Bps
600
%
20 300
10 0
0 (300)
2009
2011
2013
2015
2017
2009
2011
2013
2015
2017
2009
2011
2013
2015
2017
2010
2012
2014
2016
2019F
2019F
2019F
2018§
Italy Spain Portugal* Ireland
NPE--Nonperforming exposures (ECB Definition). *NPE data until 2012 do not include restructured loans. §Data on Ireland refer to domestic stage 3 loans only, as
of December 2018. Source: S&P Global Ratings.
15Regulatory Incentives Now Support Getting NPAs
Off The Balance Sheet
- European authorities have taken some effective measures--in particular the so-called calendar
provisioning--that will increasingly reduce banks' regulatory capital incentives to keep long-dated
nonperforming exposures (NPEs) on their balance sheets, ensuring adequate coverage while taking a
more conservative approach to capital management.
- Since 2018, calendar provisioning has required banks to set aside a minimum amount of provisions for
new NPEs.
- Although the true effect of these measures will become more apparent over time, they will increase
transparency for market participants and push banks to take a more proactive stance in getting rid of
NPEs in the coming years.
The ECB And EC Guidance Compared: Minimum Coverage Level for NPEs
(%)
After year 1 2 3 4 5 6 7 8 9 10
Secured part
ECB 0 0 40 55 70 85 100
EC 0 0 25.5 41.5 69 80 80 85 100
Unsecured part
ECB 0 100
EC 0 35 100
ECB--European Central Bank. EC--European Commission. Source: European Central Bank, European Commission.
16Despite Improvement, Asset Quality Remains A
Rating Weakness for Most Irish Banks
Net Stage 3 Loans Over Regulatory Common
Stage 3 Loan Ratios: Gross Versus Net
Equity Tier 1 Capital
Non-property business Property and construction Stage 3 loans net of provisions, as a % of CET 1
Other personal Residential mortgages
14 80
12
70
10
60
8
50
%
6
4 40
%
2
30
0
Stage 3 loans
Stage 3 loans
Stage 3 loans
Stage 3 loans
Stage 3 loans
Stage 3 loans
Stage 3 loans
Stage 3 loans
ratio (gross)
ratio (gross)
ratio (gross)
ratio (gross)
20
ratio (net)
ratio (net)
ratio (net)
ratio (net)
10
0
Ulster* PTSB Group AIB Group BOI Group Ulster* AIB Group BOI Group PTSB Group
Data as of Dec. 31, 2018. *Stage 3 loans breakdown is not publicly available *CET 1 ratio for Ulster Bank is not fully-loaded. Data as of Dec. 31, 2018. Net
for Ulster Bank. Source: S&P Global Ratings databases and definition. NPE--Stage 3 loans net of ECL allowances. Source: S&P Global Ratings
databases and ratio definitions.
17Capitalization Remains A Strength
– By our measures, capital ratios remain relatively strong compared with international peers. We expect
Irish banks’ S&P Global Ratings risk-adjusted capital ratios (RAC) to remain above 10% in 2019-2020.
– Once the impact of the review of internal models (TRIM) is fully known and captured in future capital
targets, we expect banks to increase payout ratios. As RWAs are expected to grow in 2019 and 2020 (as
opposed to past years) capital ratios are likely to stabilize or decline marginally.
Regulatory Capital Ratios And Components S&P Global Risk-Adjusted Capital, Latest Actual
And Forecasts
CET 1 - Fully loaded* AT1 Tier 2 RACF (2017A) Forecast RACF range
Threshold for strong RACF 2019-2020
35 18
30 16
25 14
12
20
10
%
%
15 8
10 6
4
5
2
0 0
AIB Group BOI Group Ulster* PTSB Group BoI Group AIB Group Ulster* PTSB Group
*Ratio for Ulster Bank is not fully loaded. Data as of Dec. 31, 2018. Source: Note: S&P Global Ratings forecasted values are for year-end 2019 and 2020.
respective banks’ Pillar 3 reports. The dotted line correspond to the minimum threshold of the strong RACF
category. *Ulster's RAC ratio stood at above 30% at end-2017. We expect this
ratio to be about 16.5%-17.5% at year-end 2020. Source: S&P Global Ratings
database and ratio definitions.
18Related Research
– The Top Trends Shaping European Bank Ratings In 2019, Feb. 28, 2019
– Countdown To Brexit: Will There Be A Silver Lining For Ireland?, Feb. 14, 2019
– AIB Group PLC, Jan. 10, 2019
– Bank of Ireland Group PLC, Jan. 7, 2019
– KBC Bank Ireland PLC, Jan. 11, 2019
– Permanent TSB Group Holdings PLC, Jan. 8, 2019
– Ulster Bank Ireland DAC, Jan. 4, 2019
– Banking Industry Country Risk Assessment: Ireland, Dec. 17, 2018
– Various Positive Rating Actions Taken On Irish Banks On Improving Funding Profile, Dec.
17, 2018
– Ireland ‘A+/A-1’ Ratings Affirmed; Outlook Remains Stable, Nov. 30, 2018
19Analytical Contacts
Letizia Conversano Anastasia Turdyeva
Primary Analyst Primary Analyst
+353-1-568-0615 +353-1-568-0622
letizia.conversano anastasia.turdyeva
@spglobal.com @spglobal.com
Simon Daly Patrick Drury Bryne
Secondary Analyst Cross Practice Sector Lead, Ireland
+353-1-568 -0621 +353-1-568-0605
simon.daly patrick.drurybryne
@spglobal.com @spglobal.com
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