DBRS Confirms AIB at BBB (high), Changes the Trend to Positive

DBRS Ratings Limited (DBRS) confirmed the ratings of Allied Irish Banks p.l.c. (AIB or the Bank), including the Long-Term Issuer Rating of BBB (high) and the Short-Term Issuer Rating of R-1 (low). The trend on the Long-term Issuer rating has been changed to Positive whilst the trend on the Short-Term Issuer rating remains Stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) is BBB (high). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The change in trend of the Long-Term Issuer rating to Positive reflects AIB’s continued progress in reducing Non-Performing Loans in the last 15 months. The ratings also consider the Bank’s strong position in the Republic of Ireland, which supports a sound and liquidity position as well as its robust capital position, underpinned by the ability to generate capital through retained earnings.

RATING DRIVERS
The Long-Term Issuer Rating could be upgraded if the Bank continues to demonstrate the ability to reduce Non-performing loans and further improves core profitability, particularly through revenue growth.

Negative rating pressure to the Long-Term Issuer Rating would arise from a deterioration in core profitability or an increase in the Bank’s risk profile. A deterioration in the Irish economy that substantially impacted the Bank’s financial fundamentals and asset quality, potentially as a result of the UK leaving the EU, could also have negative implications for the ratings, including the return of the trend to Stable.

RATING RATIONALE
With total assets of EUR 91.5 billion, AIB is one of the two predominant banking groups operating in Ireland. It offers a wide range of retail, commercial and corporate banking services within Ireland, whilst also providing retail and commercial banking services in Great Britain and Northern Ireland through its subsidiary, AIB Group (UK) plc.

AIB continued to report resilient profitability in 2018 despite revenues remained pressured by the low interest rate environment. AIB reported Net attributable Income of EUR 1,092 million in 2018, broadly in line with the year before. 2018 results benefitted from net reversals of loan loss provisions and good cost control. Net interest income (NII) was down 1% year-on-year (YoY), on a like for like basis excluding suspense interest, despite the continued reduction of retail funding costs, primarily reflecting lower revenues from the fixed income portfolio. The Bank’s net interest margin (NIM), as calculated by DBRS, remained solid and broadly flat at 2.47% in 2018. Net fees and commissions were broadly flat YoY in 2018. The cost to income ratio (including bank levies), weakened slightly to 56% in 2018 from 53% in 2017, primarily reflecting lower revenues YoY as operating expenses were flat. AIB’s bottom line profitability continued to benefit in 2018 from significant net provision write-backs for the fifth consecutive year, totaling EUR 204 million.

AIB continued to make good progress in reducing non-performing exposures (NPLs, as defined by the European Banking Authority) and NPLs were down by 41% to EUR 6.1 billion at end-2018 from EUR 10.2 billion at end-2017. The EBA NPL ratio, improved further to 9.6% (2017: 16.1%), as calculated by DBRS. The reduction of NPLs in 2018 was attributable to a combination of recoveries, restructuring of NPLs and the sale of a EUR 1.1 billion NPL portfolio. Management expects to achieve a c. 5% NPL ratio by end-2019. In March 2019, AIB announced the sale of another NPL portfolio for a total amount of EUR 1 billion. This will help the Bank meet its internal c. 5% NPL ratio target for end-2019. The track record demonstrated by the successful reduction in NPLs over 2018 – 1Q19, coupled with the Bank’s targets for further reductions, is a key driver for the Positive trend.

AIB’s funding position is underpinned by a stable and large customer deposit base that accounts for 91% of total non-equity funding at end-2018. The net loan to deposit ratio (as calculated by DBRS) was 90% at end-2018, slightly improved from 93% at end-2017, reflecting some growth in both net loans and customer deposits. Customer deposits grew by 5% in 2018, both in demand deposits and current accounts, which further evidences the Bank’s franchise strength in its domestic market. DBRS also considers that AIB is well-positioned to meet MREL (minimum requirement for own funds and eligible liabilities) requirement. The Bank has indicated its intention to issue around EUR 4 billion of holdco senior debt, of which, EUR1.65 billion was already issued in 2018 and EUR 1.0 billion in 2019.

DBRS views AIB as well positioned from a capital perspective. This is due to the progress achieved by the Bank in de-risking and its improving capacity to generate capital through retained earnings. In 2018, the Bank was able to generate (net of dividends) 120 basis points of fully loaded Common Equity Tier 1 (CET1). The Bank’s fully loaded Basel III CET1 ratio remained stable at 17.5% at end-2018. Including the countercyclical buffer that will be implemented in Ireland from July 2019, AIB is required to maintain a minimum CET1 phased-in of 11.55% and a total capital ratio of 15.05% in 2019 under the Supervisory Review and Evaluation Process (SREP). The Bank’s reported phased-in CET1 phased-in ratio of 21.1% and total capital ratio of 22.4% at end-2018 were well above the requirements.

The Grid Summary Grades for Allied Irish Banks p.l.c. are as follows: Franchise Strength – Strong/Good; Earnings Power – Good; Risk Profile – Moderate; Funding & Liquidity – Strong/Good; 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 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: October 20, 2005
Last Rating Date: April 25, 2018

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960

For more information on this credit or on this industry, visit www.dbrs.com.