DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Allied Irish Banks Plc (AIB or the Bank), including the Long-Term Issuer Rating at A (low) and the Short-Term Issuer Rating at R-1 (low). The trend on the Long-Term ratings has been revised to Stable, while the trend on the Short-Term 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 change of the trend to Stable from Negative on AIB’s Long-Term ratings reflects DBRS Morningstar’s view that the financial impact from the disruptions created by the COVID-19 pandemic have been so far less severe than initially anticipated, as well as the progress that the Bank has continued to make in reducing the level of non-performing loans (NPLs) through both organic recoveries and asset sales. AIB's ratings continue to reflect the Bank's solid capital position with ample cushions over regulatory minimum requirements and its sound funding and liquidity position underpinned by the robust retail franchise in the Republic of Ireland.
However, AIB’s ratings also consider that profitability remains pressured by the persistent low interest rate environment. DBRS Morningstar recognises that the Bank’s asset quality has also been partially supported by significant pandemic-related government support measures. However, the recent return to of some restrictive measures in Ireland has increased the level of uncertainty regarding the long-term impact of the pandemic on both asset quality and profitability, particularly once government support is fully removed.
The Long-Term ratings would be upgraded if the Bank demonstrates further material reduction of NPLs and improved underlying profitability while maintaining the strong capital position.
A downgrade of the Long-Term ratings would likely be driven by a significant credit deterioration and/or a material reduction in the capital position.
Franchise Combined Building Block (BB) Assessment: Good
AIB is a leading retail and commercial bank in Ireland with a strong domestic retail banking franchise and a leadership position in digital banking. The Bank benefits from market leading positions in most major business lines, including 27% market share in mortgages in 9M 2021. AIB also has a presence in the UK. Within Great Britain the Bank is refocusing its activity towards corporate banking in specific sectors such as healthcare, renewables and infrastructure and, in November 2021, announced the sale of GBP 600 million SME loans to Allica Bank in line with its strategy to completely exit the GB SME segment. In its domestic market AIB is pursuing inorganic growth opportunities including the potential acquisition of a EUR 4.2 billion portfolio of corporate and commercial loans from Ulster Bank Ireland DAC, the Irish subsidiary of Natwest Group, agreed in June 2021. In addition, the Bank is expanding its product offering in the wealth management and insurance segments through the recently announced acquisition of Goodbody, a financial services provider mainly active in the asset and wealth management business, and a joint venture with Great-West Life to provide life insurance, pension and investment products.
Earnings Combined Building Block (BB) Assessment: Moderate / Weak
AIB’s earnings profile remains under pressure due to the persistent low interest rate environment and the uncertainty related to the development of the COVID-19 pandemic. In H1 2021, however, the Bank reported net attributable income of EUR 274 million compared to a net loss of EUR 700 million in H1 2020. The result was largely driven by loan loss reversals of EUR 103 million in H1 2021 compared to EUR 1,216 million loan loss provisions in H1 2020. The loan loss reversals reflected the improved macroeconomic assumptions in the Bank’s credit models as well as improved credit quality and stage transfers. Total operating income remained broadly stable in H1 2021 Year-on-Year (YoY) as persistent pressure on net interest income (NII) was offset by increasing net fees and commissions and other income. Underlying operating expenses decreased by 1% YoY in H1 2021, driven by lower staff and administrative costs. Including the bank levies and regulatory fees, the cost-income ratio of AIB was 68% in H1 2021, stable compared to 2020 and H1 2020.
Risk Combined Building Block (BB) Assessment: Moderate / Weak
AIB now has a conservative risk profile with credit risk primarily originating from its lending portfolio in Ireland and the UK. DBRS Morningstar recognises that the Bank continued to make progress in reducing its stock of NPLs in 2021. Total NPLs reduced to EUR 3.8 billion at end-H1 2021 from EUR 4.3 billion at end-2020, mainly due to the sale of a EUR 0.6 billion NPL portfolio of loans that were long overdue. At end-Q3 2021, AIB reported an additional EUR 0.3 billion of organic recoveries while in October 2021, the Bank announced an additional EUR 0.4 billion portfolio sale. Taking these into account, the pro-forma stock of NPLs at end-Q3 2021 would have been EUR 3.1 billion and the NPL ratio would have improved to 5.3%, in line with end-2019 but lower than the 6.5% at end-H1 2021 and 7.3% at end-2020. AIB, in line with other Irish banks, has been particularly proactive in recognising the vulnerability of the COVID-19 crisis in its Stage 2 portfolio which increased to EUR 7.8 billion at end-H1 2021 from EUR 4 billion at end-2019, representing 13% of gross loans at end-H1 2021.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
DBRS Morningstar views AIB's funding profile as sound and stable, underpinned by the Bank's large customer deposit base which accounted for 81% of total non-equity funding at end-H1 2021. Customer deposits further increased to EUR 90.7 billion at end-Q3 2021, up by 11% compared to end-2020 and 26% vs. end-2019. The increase of customer deposits led to a further reduction of the loan-to-deposit ratio to 62% at end-Q3 2021 vs. 69% at end-2020 and 85% at end-2019. The Bank’s funding profile is also well diversified by maturity and instruments. AIB accessed EUR 10 billion T-LTRO III at end-Q3 2021, driven by the positive impact on profitability. At end-H1 2021 the Bank reported a strong liquidity coverage ratio (LCR) of 201% and a net stable funding ratio (NFSR) of 149%.
Capitalisation Combined Building Block (BB) Assessment: Good / Moderate
A key consideration for the confirmation of the ratings is AIB's solid capital position with ample cushions over regulatory minimums. At end-Q3 2021, AIB reported a fully-loaded CET1 ratio of 16.6%, improved from 15.6% at end-2020 due to retained earnings and lower risk weighted assets (RWAs), counterbalanced by the acquisition of Goodbody which had a negative impact of 16 basis points (bps). The Bank continues to maintain a significant capital buffer against the minimum capital requirement which is deemed sufficient to navigate the current operating environment as well as inorganic growth opportunities. The minimum CET1 ratio requirement was 10.19% in 2021 leading to a capital buffer of 641bps on a fully-loaded basis at end Q3-2021. The proposed Ulster Bank acquisition is expected to have a negative capital impact of 160 bps on the CET1 ratio, which DBRS Morningstar considers significant but manageable in view of the Bank’s current capital. The Bank has a CET1 ratio management target of >13.5% by 2023.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/390750
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 Morningstar Inc. and Company Documents, AIB’s Annual Report 2019 and 2020, AIB’s Interim Reports H1 2020 and H1 2021, AIB’s Presentations 2020 and H1 2021, AIB’s Q3 2021 Trading Update. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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. 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/390751
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 20, 2005
Last Rating Date: May 18, 2021
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