DBRS Ratings GmbH (DBRS Morningstar) confirmed the BBB (low) Long-Term Issuer Rating of Permanent tsb p.l.c (the Bank or PTSB) and the BB (high) Long-Term Issuer Rating of Permanent TSB Group Holdings p.l.c (PTSBG or the Group), the top-level holding company. The Bank’s Short-Term Issuer Rating was confirmed at R-2 (middle), and PTSBG’s Short-Term Issuer Rating was confirmed at R-3. The trend on all the ratings has been revised to Stable. The Bank’s Intrinsic Assessment (IA) is BBB (low) 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 change of the trend to Stable, from Negative, reflects DBRS Morningstar’s view that the financial disruptions of the COVID-19 pandemic on PTSB have been less severe than initially anticipated. While some uncertainty remains regarding the long-term impact of the pandemic once the government support measures are fully removed, the Bank has continued to demonstrate its ability to reduce its stock of non-performing loans (NPLs). The rating also takes into account the Bank’s robust capital ratios as well as its sound liquidity and funding position, underpinned by its stable customer deposit base. PTSB’s ratings, however, also reflect the bank’s weak profitability driven by ongoing revenue pressure from the ultra-low interest rate environment.
The Bank’s asset quality during the pandemic, similar to domestic peers, has been partly supported by a better than anticipated recovery of the Irish economy and significant government and bank support measures. DBRS Morningstar considers the proposed acquisition of a EUR 7.6 billion loan portfolio and other assets from Ulster Bank DAC Ireland as a significant transaction for PTSBG and will reassess the impact of the transaction on PTSBG’s ratings once more information is available.
The Long-Term ratings would be upgraded if the Bank demonstrates a significant and sustained improvement in profitability, in conjunction with a continuation of the improved asset quality.
A downgrade of the Bank’s Long-Term ratings would likely be driven by any further deterioration in profitability or a significant deterioration of asset quality.
Franchise Combined Building Block (BB) Assessment: Good / Moderate
PTSBG is a banking group operating in the Republic of Ireland (ROI) which mainly provides traditional retail and commercial banking products and services to its retail and SME customers. The group maintains a meaningful market share in the residential mortgage segment which is its core business, accounting for 97% of total gross loans at end-H1 2021.
In July 2021, PTSB announced that it had signed a Memorandum of Understanding (MoU) with Natwest Group for the acquisition of around EUR 7.6 billion of assets from Ulster Bank. DBRS Morningstar notes that this would be, if finalised, a significant transaction for the Group, potentially increasing the Bank's current loan portfolio by over 50%, and allowing PTSB to significantly increase its market share in the residential mortgage segment as well as marginally increase its exposure towards consumer and SMEs in line with its effort to diversify its exposure in these segments. We will assess the overall impact of the acquisition once there is more information on the financial and capital impact.
Earnings Combined Building Block (BB) Assessment: Weak / Very Weak
DBRS Morningstar continues to view profitability as a key challenge for PTSBG. Historically low earnings generation has been further undermined by the challenging operating environment, low interest rates and lower income as a result of the de-risking. Notwithstanding the significantly lower cost of risk compared to 2020, PTSBG continued to be loss making in H1 2021 as net interest income (NII) remains under significant pressure, negatively impacting the Bank’s revenue generation and outweighed by operating costs.
In H1 2021, PTSBG reported a net loss of EUR 5 million, compared to a net loss of EUR 54 million in H1 2020. The lower net loss benefited from significantly lower loan loss provisions, which reduced to EUR 3 million, from EUR 75 million in H1 2020, reflecting the more positive macroeconomic outlook which led to less forward looking impairments compared to 2020. NII was down 11% YoY in H1 2021 reflecting the persistent low interest rate levels, but also lower revenues due to the sale of a portfolio of performing loans in Q4 2020, lower margins and the cost of excess liquidity. The Group is trying to offset the ongoing NII revenue pressure with lending volume growth. Reflecting weaker operating revenue generation YoY, the Group’s Income Before Provisions and Taxes was negative in H1 2021. Due to further investments in digital banking PTSBG’s operating costs (excluding regulatory charges) increased by 4% YoY in H1 2021. The cost-income ratio was 88% in H1 2021 evidencing the challenge the Group faces.
Risk Combined Building Block (BB) Assessment: Moderate / Weak
PTSBG's risk profile is moderate, with credit risk mainly stemming from the Group's residential mortgage portfolio, which is generally low risk. At end-H1 2021, the residential mortgage book had a weighted average loan to value (LTV) of 64%, decreasing from 66% at end-2020. The Group’s asset quality metrics improved at end-Q3 2021, supported by the Bank’s continued effort in de-risking. The actual long term impact of the pandemic remains uncertain at this point in time, also taking into account further economic restrictions in Ireland and ongoing support measures in place.
The Group’s total gross NPLs decreased to EUR 1 billion at end-Q3 2021 (vs. EUR 1.1 billion at end-2020 and EUR 1.05 billion at end-2019) thanks to organic reduction and lower inflows. The NPL ratio decreased at end-Q3 2021 to 6.7% from 7.6% at end-2020. In November 2021, PTSBG announced the sale of a non-performing loans portfolio totalling EUR 390 million (Gleinbeigh III transaction). This is expected to lead to an NPL ratio in the low 5% level which is more in line with the Group’s commitment to reach a mid-single digit NPL ratio.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
PTSBG funding profile is supported by a stable retail customer deposit base. At end-H1 2021, customer deposits represented 94% of total funding, with around 92% of the deposit base being retail deposits. Supported by higher savings during the lockdown period total retail deposits increased by 9% YoY in 2020 and 4% in H1 2021 and could possibly benefit further from the exit of two foreign banks from the Irish market. As a result, PTSBG’s loan-to-deposit (LTD) ratio reduced to 77% at end-H1 2021 from 79% at end-2020 and 91% at end-2019. The Group's liquidity coverage ratio (LCR) was 318% at end-June 2021 vs. 276% at end-2020 and 170% at end-FY19. The net-stable-funding-ratio (NSFR) was % at end-June 2021 vs. 160% at end-2020 and 138% at end-FY19.
Capitalisation Combined Building Block (BB) Assessment: Moderate / Weak
PTSBG's capital position remains sound despite the Group’s net losses in 2020 and H1 2021. The fully loaded CET1 ratio was 15.3% at end-H1 2021, increasing from 15.1% at end-2020 and 14.6% at end-2019 (15.1% at end-Q3 2021). Incorporating the impact of the Gleinbeigh III transaction to be completed in FY22, the pro-forma CET1 ratio is expected to increase by 0.6% on a fully-loaded and transitional basis. At end-H1 2021, PTSB maintained a sound buffer against the CET1 minimum Supervisory Review and Evaluation Process (SREP) requirement of 8.94% in 2021. However, DBRS Morningstar notes that a key consideration for the Bank’s capital position is its weakened internal capital generation. The Group has a fully loaded long-term CET1 ratio management target of 13.5%, which would largely reflect inorganic growth through the announced acquisition.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/389548
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
The sources of information used for this rating include PTSBG’s Annual Report 2019 and 2020, PTSBG’s Interim Reports H1 2020 and H1 2021, PTSBG’s Presentations 2020 and H1 2021, PTSBG’s company announcements 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.
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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/389547
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Mario De Cicco, Vice President - Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: October 27, 2009
Last Rating Date: May 13, 2021
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