DBRS Confirms Bank of Ireland at A (low); Trend Stable

DBRS Ratings Limited (DBRS) has confirmed the ratings of The Governor and Company of the Bank of Ireland (BoI, the Bank or the Group) at A (low), including its Long-Term Issuer Rating, and its Long-Term Senior Debt and Long-Term Deposits ratings and the Short-Term Debt and Short-Term Deposits ratings at R-1 (low). The Bank’s intrinsic assessment (IA) remains at A (low) and the Support Assessment remains unchanged at SA3. The trend on all ratings is Stable. For a complete list of ratings, please see the table at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings reflects the stable performance and improvements achieved by the Bank in recent years which has resulted in a solid financial profile. The confirmation also takes into consideration the improved asset quality, which is now closer in line with European peers, the solid and increasingly stable earnings, the increase in the Bank’s capital and the improved funding profile.

The trend on the Bank’s Issuer Rating is Stable. The stable trend takes into account that although the Bank could potentially face earnings pressure in the event of a hard Brexit scenario, the improved capital and funding position of the Bank provide a good level of mitigation.

RATING DRIVERS
Further upward pressure on the ratings would require i) stable loan book growth, ii) further improvement in asset quality indicators, and iii) a continued track record in strong and stable earnings.

Negative rating pressure could arise from i) a reversal in asset quality improvements, ii) significant weakening in key segments of the Bank’s franchise, or iii) if either the Irish or UK economies were to deteriorate such that BoI’s financial fundamentals were substantially impacted.

RATING RATIONALE
BoI’s ratings are underpinned by the Bank’s leading market positions and diverse domestic franchise that combines retail banking, commercial banking and life insurance. DBRS considers BoI’s leading domestic franchise to be a key factor underpinning the Bank’s IA.

BoI has continued to demonstrate strong earnings capacity in 2017. For the full-year 2017, BoI reported a profit before tax (PBT) of EUR 852 million, down 18% year-on-year (YoY). On an underlying basis, PBT was also down 2% at EUR 1.1 billion, mainly due to higher operating expenses, the impact on net interest income of the fall in sterling, the low interest rate environment and reduced gains on sale of sovereign bonds and other assets. Statutory net income for 2017 was EUR 692 million.

The Bank’s net interest margin (NIM) was 2.29% for the full-year, up 9 basis points YoY, primarily driven by further reductions in cost of funding and discipline on pricing. The Bank expects NIM to be around 2.24%, in line with the December 2017 figure.

Operating expenses remain a key focus for the Bank. In 2017, underlying operating expenses (excluding levies and regulatory charges, as well as Core Banking Platforms Investment charges) were 3% up on 2016, due to higher pension costs and depreciation and amortization costs. Total costs were 6% higher reflecting the Bank’s investment in its core banking platforms. On an underlying basis the Bank’s cost to income ratio was 59% in 2017. The Bank expects operating expenses to decline in 2018 as a step towards the target of a cost to income ration below 50% in the medium term.

Impairment charges decreased significantly in 2017, at only EUR 15 million, down from EUR 176 million a year ago. The notable improvement reflects strong performance of the Group’s loan portfolios, continued decreases in non-performing exposures and impaired loans, as well as improved economic environment in countries where the portfolios are located. The Bank expects its impairment charge to increase to c.20 bps in 2018, due to the transition to IFRS 9 and reduced pace of impairment reversals.

BoI’s positive trend on asset quality continued in 2017. The continued positive momentum in the macroeconomic environment in Ireland and the Bank’s success in dealing with problematic loans were key factors in the continuation of the improvement in asset quality. At end-2017 the bank’s impaired loans ratio was down to 5.2% (7.6% in 2016) and impaired loans were EUR 4 billion, down from EUR 6.2 billion at end-2016. Total coverage ratios were 49% of impaired loans, compared to 54% at end-2016.

BoI’s funding and liquidity profile remains strong. The Bank mainly relies on customer deposits for the principal funding source with a moderate use of the wholesale markets. Total customer deposits were relatively flat YoY at EUR 76 billion at end-2017 and the loan to deposit ratio decreased marginally to 100% (2016:104%). DBRS notes that the Retail Ireland division increased its deposit base to EUR 44 billion, mainly as a result of higher current account balances, reflecting strong economic activity.

BoI’s capital position remains good. BoI reported a fully loaded Basel 3 Common Equity Tier 1 (CET1) ratio of 13.8% at end-2017, up c.150 basis points (bps) YoY. BoI is required to maintain a minimum CET1 ratio of 8.625% on a transitional basis from January 1, 2018 following the Supervisory Review and Evaluation Process (SREP). The Bank expects to maintain a CET1 ratio of over 13% on a transitional basis and on a fully loaded basis by the end of the O-SII phase-in period (including also a management buffer). The fully loaded Basel 3 leverage ratio stood at 6.2% at end-2017 (2016: 6.4%).

The Grid Summary Grades for BoI are as follows: Franchise Strength – Strong; Earnings Power – Good; Risk Profile – Good/Moderate; Funding & Liquidity – Strong; Capitalisation – Good.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found can be found at: http://www.dbrs.com/about/methodologies
The sources of information used for this rating include SNL Financial and company disclosures. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: George Yiannakis, Vice President, Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: September 6, 2005
Most Recent Rating Update: July 14, 2017

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

DBRS rating definitions and the terms of use of such ratings are available at www.dbrs.com

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.