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

DBRS Ratings Limited (DBRS) confirmed the ratings of The Governor and Company of the Bank of Ireland (BoI or the Bank), including the Long-Term Issuer Rating of A (low) and the Short-Term Issuer Rating of R-1 (low). The trend on all ratings remains Stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) is A (low). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the Long-Term Issuer rating reflects BoI’s dominant position in its domestic market in retail and commercial banking along with its franchise diversification in the UK. The ratings also consider the Bank’s resilient profitability, its sound funding and liquidity and good capital position. The ratings also take into account that although the Bank has been successful in reducing Non-Performing exposures (NPEs) in the last few years, the NPE ratio remains above the European average and the Cost to Income ratio remains high.

RATING DRIVERS
Positive rating pressure to the Bank’s Long-Term Issuer Rating would require a further material reduction of NPEs and significant improvement in profitability and efficiency.

Negative rating pressure to the Bank’s Long-Term Issuer Rating could arise from a reversal in asset quality, and if either the Irish or UK economies were to deteriorate such that BoI’s financial fundamentals were substantially impacted, potentially as a result of the UK leaving the EU.

RATING RATIONALE
With total assets of EUR 124 billion, BoI is one of the two predominant banking groups operating in the Republic of Ireland. The Bank has a retail footprint in the UK, particularly in mortgage lending and in consumer banking, as well as a retail and business banking operation through its Northern Ireland branch network.

In 2018, BoI reported net attributable income of EUR 620 million, down 6.6% year-on-year (YoY), partly as a result of lower results from financial operations reflecting a negative impact on valuations items of market movements. Results were supported by net write backs of loan impairments and stable banking revenues (including net interest income, commissions and insurance related revenues). The Bank’s net interest income (NII) remained flat YoY as lower revenues from the impact of the low interest rate environment on liquid asset yields and higher wholesale funding costs YoY were largely offset by loan growth and continued reduction in the cost of retail deposits. The Cost to Income ratio (as calculated by DBRS) was a high 73% in 2018, having deteriorated from 68% in 2017, largely affected by the pressure on total operating revenues from lower revenues from financial operations and despite operating expenses remaining flat YoY.

BoI’s improvements in asset quality continued in 2018. At end-2018, the Bank’s NPEs according to European Banking Authority (EBA) definition were down 24% YoY to EUR 5 billion, down from EUR 6.5 billion at end-2017, due to organic reduction through recoveries. As a result, the NPE ratio reduced to 6.3% from 8.3% a year ago although it remains above the average of European Banks and similarly European Banks rated by DBRS. Total coverage levels were 32% of NPEs, compared to 36% at end-2017, which is also at the lower end of its European peer group.

BoI’s funding and liquidity profile remains solid. At end-2018, customer deposits accounted for 88% of total non-equity funding and the loan to deposit ratio marginally improved to 97%. Monetary authority funding was reduced in 2018 to EUR 2.7 billion from EUR 5.0 billion at end-2017 and largely relates to Bank of England’s TFS (Term Funding Scheme). The Bank’s Liquidity profile also remains strong. At end-2018 BoI had liquid assets of EUR 25 billion accounting for around 20% of the Bank’s assets. At end-2018 BoI reported a Liquidity Coverage Ratio of 136%, and a Net Stable Funding Ratio of 130%.

DBRS views BoI’s capital position as strong, given its recurrent ability to create capital through retained earnings and progress in de-risking. BoI reported a fully loaded Basel 3 Common Equity Tier 1 (CET1) ratio of 13.4% at end-2018, down 40 basis points (bps) YoY, primarily driven by the IFRS 9 impact of 20 bps and the impact of TRIM (Targeted Review of Internal Models), transformation investments and loan growth which led to a 6% increase of RWAs at end-2018. On a transitional basis, the CET1 ratio was 15.0%, down from 15.8% at end-2017, well above the minimum regulatory requirement of 10.65% expected for 2019 (including the countercyclical buffer of 1% that will be introduced in Ireland from July 2019). The fully loaded Basel 3 leverage ratio stood at 6.3% at end-2018, broadly in line with the year before.

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

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). 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, European Banking Authority and Company disclosures. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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: Maria Rivas, Senior Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: September 6, 2005
Last Rating Date: April 23, 2018

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