DBRS Morningstar Confirms Allied Irish Banks at A (low), Trend Revised To Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long-Term Issuer Rating of Allied Irish Banks p.l.c. (AIB or the Bank) at A (low). The trend has been changed to Negative from Stable. At the same time, DBRS Morningstar confirmed the Short-Term Issuer Rating of R-1 (low) with Stable trend. The support assessment remains SA3 and the Intrinsic Assessment (IA) was maintained at A (low). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The change of the trend to Negative on AIB’s Long-Term Issuer rating reflects our view that the scale of economic and market disruption resulting from the coronavirus (COVID-19) pandemic is negatively affecting the operating environment for banks in Ireland and we expect this to translate into lower revenues and higher loan loss provisions in coming quarters for AIB. As one of the two predominant banking groups in the Republic of Ireland, AIB has some concentration to sectors that could potentially be severely affected amid the challenging economic environment. This makes the Bank more vulnerable to credit losses and asset quality deterioration when the debt moratorium period expires. The implications for the medium to long-term will depend on the evolution of the outbreak, the length of the economic shutdown, as well as the transition phase of the recovery. Downward rating pressure would intensify should the crisis be prolonged.

The confirmation of AIB’s Long-Term Issuer rating at A (low) takes into account the Bank’s robust regulatory capital position and ample cushions over minimum regulatory requirements which should mitigate the impact of expected asset quality deterioration. The ratings continue to reflect the Bank’s strong funding and liquidity position as well as its franchise strengths as one of the leading banks in Ireland.

RATING DRIVERS

An upgrade of the Long-Term Issuer rating is unlikely given the change in trend. The Trend would return to Stable if the COVID-19 crisis does not translate into material asset quality deterioration and the impact is manageable from a profitability and capital perspective.

A downgrade of the Long-Term Issuer Rating could arise if, as a result of COVID-19, profitability and asset quality deteriorates materially, significantly reducing capital cushions.

RATING RATIONALE

The negative impact from the COVID-19 crisis has already emerged in Q1. AIB reported a loss largely as a result of higher loan loss provisions, although credit models did not incorporate the macro-economic scenario of shutdown on the economy. As a result, DBRS Morningstar expects higher loan loss provisions related to the update of COVID-19 impact on credit models in Q2. In Q1 the Bank reported an annualised cost of risk of 136 bps. Operating revenues were weaker YoY largely reflecting pressure on net interest income from low interest rates and some impact on valuations of derivatives.

DBRS Morningstar recognises the progress made by the Bank in the last three years in reducing Non-Performing Loans (NPLs, as defined by the European Banking Authority), and the NPL ratio was to 5.9% at end-Q1 2020. However, AIB’s exposure to vulnerable sectors including consumer loans, real estate and construction, retail, distribution, and transport represent around 38% of total end-March 2020 gross loans, which could be negatively affected in this environment and result in higher NPL levels, reversing the trend seen in asset quality in the last few years. DBRS Morningstar also notes that AIB’s NPL reduction in recent years was partly supported by significant sales of NPLs to institutional investors, which under a more challenging operating environment may be more difficult.

A key consideration for the confirmation of the ratings is AIB’s solid capital position with ample cushions over regulatory minimums. At end-March 2020, AIB had a transitional CET1 ratio of 18.7% and a fully loaded CET1 ratio of 16.2%, significantly above the new 2020 minimum requirement of 11% (after the removal of the countercyclical buffers for exposures in Ireland and in the UK). This translates to around a capital cushion of EUR 4.1 billion, which should mitigate some of the impact from asset quality deterioration. AIB’s funding and liquidity position remains strong and the Bank reported a Liquidity Coverage Ratio of 155% at end-Q1.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

The Grid Summary Grades for Allied Irish Banks p.l.c. are as follows: Franchise Strength – Strong/Good; Earnings Power – Good/Moderate; Risk Profile – Moderate; Funding & Liquidity – Strong/Good; Capitalisation – Good.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019). https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

The sources of information used for this rating include AIB’s 2019 Annual Report and Q1 2020 Trading update, AIB’s 2019 Annual Results Presentation, 2019 European Banking Authority Transparency Exercise and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

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

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/361273

Ratings assigned by DBRS Ratings GmbH, are subject to EU and U.S. regulations only

Lead Analyst: Pablo Manzano, 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: December 19, 2019

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