DBRS Upgrades Permanent TSB’s Long-Term Ratings to BB (high), Trend Remains Positive

DBRS Ratings Limited (DBRS) upgraded the Long-Term Issuer Rating of Permanent tsb p.l.c (the Bank) to BB (high) from BB and the Long-Term Issuer Rating of Permanent TSB Group Holdings p.l.c (PTSB or the Group), the top-level holding company, to BB from BB (low). All Long-Term ratings remain on a Positive trend. Concurrently, the Bank’s Short-Term Issuer Rating was also upgraded to R-3 from R-4. The trend on the Bank’s Short-Term ratings remains Positive. PTSB’s R-4 Short-Term Issuer Rating was confirmed with a Stable Trend. The Bank’s Intrinsic Assessment (IA) was raised to BB (high) from BB and the Support Assessment remains at SA1. The Group’s Support Assessment is SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS
The upgrade of the Long-Term Issuer Rating considers the Group’s expected significant reduction of Non-Performing loans (NPLs) after the announcement of two major NPL transactions in 2018 year-to-date (YTD). The Positive trend reflects DBRS’s expectations that with significantly lower NPLs, PTSB should be able to grow profitability. This is supported by the sound economic environment in Ireland and the Group’s recent strong growth of mortgage market share in its domestic market. The Group has meaningful market shares of around 17% for mortgage loans and 12% for retail deposits in Ireland.

PTSB’s Long-Term Issuer Rating is positioned one notch below the Bank’s IA reflecting the structural subordination of the holding company.

RATING DRIVERS
The Long-Term ratings have a Positive trend. Further positive pressure on the ratings would require a longer track record of revenue growth and cost discipline as well as further progress in asset quality.

Given the Positive trend, a negative rating action is unlikely in the short to medium term. However, it could arise if the announced NPL transactions are not successfully completed or if asset quality deteriorates dramatically reflecting high risk undertaking in their new lending activity. The trend could also return to Stable if the Bank does not demonstrate further improvement in core profitability.

RATING RATIONALE
A key consideration for the rating upgrade was the significant reduction in the Group’s Non-performing loans (NPLs) since end-2017, primarily driven by the agreement to sell EUR 2.1 billion of NPLs to Lone Star and the deconsolidation of a securitization consisting of EUR 1.3 billion of treated NPLs. After these transactions, gross NPLs are expected to reduce to around EUR 1.6 billion, significantly down from EUR 5.3 billion at end-2017. As a result, the pro-forma NPL ratio is expected to be below 10% at end-2018, a material improvement from a very high 25.6% at end-2017. PTSB expects to continue to work out these NPLs over the medium term to meet a normalised NPL ratio.

Improving core profitability remains a key rating driver. The Group returned to net profits in 2017, and in 1H18, net income was EUR 56 million, around 56% up Year-on-Year (YoY), largely supported by some one-offs and cost discipline. Net interest income (NII), however, was down around 5% YoY primarily affected by revenue pressure from low interest rates and the repayment of some government bonds. Some one-off gains from the sale of debt securities and the sale of a derivative position helped to offset some of the NII pressure and as well as the need to build additional provisions related to the cost of redress of legacy tracker mortgages. The Group continued to focus on cost containment and this was more apparent in 1H18 with total operating expenses flat YoY. PTSB’s adjusted cost to income ratio (which excludes the Bank Levy and other regulatory costs) was 61% in 1H18, improved from 65% in 2017.

PTSB’s funding profile remains moderate, underpinned by a stable customer deposit base. At end-1H18, customer accounts totalled EUR 17.0 billion representing 83% of total non-equity funding. The loan to deposit ratio further improved to 105% at end-1H18. Monetary authority funding reduced significantly to EUR 0.2 billion at end-2017 from very high historical levels and EUR 1.4 billion at end-2016. The Group also reported a satisfactory Net Stable Funding Ratio (NSFR) of 112% and a Liquidity Coverage Ratio (LCR) of 156% at end-1H18.

PTSB has a sound capital position and it has strengthened following the significant progress in de-risking. Moreover, DBRS recognises that PTSB is improving its ability to reinforce capital through retained earnings after 18 months of positive results. All these should, in DBRS’s view, help offset the negative impact arising from the Targeted Review of Internal Models (TRIM), (expected to lead to an increase of EUR 1.7 billion of risk weighted assets in 2H18). PTSB has a sound cushion over its minimum capital requirements. The phased-in CET1 (phased-in) ratio was 16.2% and the total capital ratio was 17.5% at end-June 2018. These compare to a minimum Overall Capital requirement (OCR) for CET1 (phased-in) ratio of 9.825% and a total capital ratio (phased-in) of 13.325% according to the Supervisory Review and Evaluation Process (SREP).

The Grid Summary Grades for PTSB are as follows: Franchise Strength – Good/Moderate; Earnings – Moderate/Weak; Risk Profile – Moderate; Funding/Liquidity – Moderate; Capitalisation – Moderate.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). These 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 FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: October 27, 2009
Most Recent Rating Update: May 1, 2018

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