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 remains 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 Long-Term Issuer Rating reflects PTSBG’s relatively good retail franchise in Ireland as well as DBRS Morningstar’s view that PTSBG’s earnings are characterized by historically weak revenue generation as well as poor operating efficiency. PTSBG’s effort to turn around its profitability should be supported by its recent acquisition of a c. EUR 6.8 billion loan portfolio from Ulster Bank DAC Ireland (Ulster Bank), the Irish subsidiary of NatWest Group, as well as organic growth opportunities.
PTSBG’s risk profile is constrained by the Group’s low capacity to absorb credit losses, although we note that PTSBG’s asset quality remains on an improving trend, with the Group further demonstrating its ability to reduce its stock of nonperforming loans (NPLs) in recent years. However, uncertainty remains due to the deteriorating macroeconomic environment. Finally, the ratings take into account the Group’s high capital ratios, despite weak internal capital generation, as well as its sound liquidity and funding position, underpinned by its stable customer deposit base.
The Long-Term Issuer Rating would be upgraded in case of significant and sustained improvement of operating profitability with no material deterioration in asset quality and/or capitalisation.
The Long-Term Issuer Rating would likely be downgraded if PTSBG fails to improve its operating profitability in the medium term and/or experiences a significant deterioration of its asset quality/capitalisation.
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 banking products and services to households and, to a lesser extent, SME customers. The Group has a relatively good market position in the residential mortgage market in Ireland, which also represents the vast majority of its balance sheet. PTSBG’s market share in new residential mortgage lending was 16.9% in Q3 2022, with new lending increasing by 31% Year-on-Year (YoY) at end-Q3 2022. This demonstrates PTSBG appears well positioned to benefit from the banking environment in Ireland which has seen a reduction in competition following the exit of KBC and Ulster Bank announced in 2021.
In Q4 2022, PTSBG has incorporated EUR 5.2 billion out of the total EUR 6.2 billion mortgage loans acquired from Ulster Bank. DBRS Morningstar notes that this is a very significant acquisition for PTSBG as it will increase the size of the Group's loan portfolio by around 50% versus end-Q3 2022.
Earnings Combined Building Block (BB) Assessment: Weak / Very Weak
DBRS Morningstar continues to view profitability as a key challenge for PTSBG. Notwithstanding the significantly lower cost of risk, PTSBG continued to be loss making in 2021 as pressure on earnings generation led to very weak operating efficiency. In the short/medium term, DBRS Morningstar expects the Group’s profitability to benefit from the increasing interest rates as well as lending growth opportunities coming from the exit of two major players from the Irish banking sector. In addition, the acquisition of the Ulster Bank Ireland portfolio is expected to provide an additional EUR 180 million gross interest income in 2023, partly offset by EUR 40 million additional funding costs and EUR 50 million operating expenses.
In H1 2022, PTSBG reported a net loss of EUR 35 million compared to a net loss of EUR 5 million in H1 2021. The higher losses were mainly driven by one-off costs related to the Ulster Bank transaction as well as higher operational expenses driven by an acceleration of the investments related to the Group’s digital transformation plan. Notwithstanding a 7% increase in operating income YoY, the Group reported an underlying negative income before investment and taxes (IBPT, excluding one-offs) of EUR -15 million in H1 2022, compared to EUR 3 million in H1 2021. The cost-income ratio was 108% in H1 2022, compared to 100% in H1 2021.
Risk Combined Building Block (BB) Assessment: Weak
DBRS Morningstar views PTSBG's risk profile as constrained by the Group’s very low capacity to absorb credit losses through earnings generation and without capital erosion. On the other hand, we note that, albeit slightly deteriorating in 2020, due to the combined effect of the COVID-19 pandemic and deleveraging in the buy-to-let performing portfolio, PTSBG asset quality metrics have been constantly improving since 2016, supported by the Group’s continued effort in de-risking through asset sales and organic cure. However, uncertainty remains, due to the deteriorating macroeconomic outlook which could potentially drive NPLs up again.
PTSBG is mostly exposed to credit risk stemming from the Group's residential mortgage portfolio (accounting for 58% of the total balance sheet), which is generally low risk. PTSBG’s NPL ratio improved to 5.2% at end-H1 2022, down from 5.5% at end- 2021 and 7.6% at end-2020. The Group expects the NPL ratio to be lower than 4% once the integration of the Ulster Bank loan portfolio is completed.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
PTSBG’s funding profile is good, supported by a stable and growing retail customer deposit base. At end-H1 2022, customer deposits represented 92% of total funding, with around 94% of the deposit base being retail deposits and current accounts. Supported by higher savings during the lockdown period, total retail deposits have increased significantly since the outbreak of the COVID-19 pandemic. The exit of the two major foreign banks from the Irish market led to an additional increase in customer deposits by 9% at the end-9M 2022 versus end-2021. As a result, PTSBG’s loan-to-deposit (LTD) ratio further decreased to 72% at end-H1 2022 from 75% at end-2021 and 79% at end-2020. The Group's liquidity coverage ratio (LCR) was 315% at end-June 2022 vs. 274% at end-2021. The net-stable-funding-ratio (NSFR) was 183 % at end-June 2022 vs. 170% at end-2021.
Capitalisation Combined Building Block (BB) Assessment: Moderate / Weak
PTSBG's capital position remains adequate despite the weak internal capital generation. The fully loaded CET1 ratio was 14.7% at end-H1 2022, in line with the fully-loaded CET1 ratio reported at end-2021. However, the fully-loaded CET1 ratio at end-H1 2022, benefited from the derecognition of the RWAs related to the sale of EUR 390 million non-performing loans in 2021 (Glenbeigh III transaction). Therefore on a pro-forma basis, the CET1 ratio decreased from 15.1% at-end 2021. In 2022, the Group finalised an additional loan portfolio sale (Glenbeigh IV) for a total amount of EUR 770 million, which is expected to provide an additional 85 basis points (bps) benefit to the CET1 fully-loaded ratio.
As such, PTSBG has been able to maintain a sound buffer against the CET1 minimum Supervisory Review and Evaluation Process (SREP) requirement which was 8.94% in 2022. This buffer is expected to decrease due to the reintroduction of the countercyclical capital buffer as well as the full incorporation of the EUR 6.8 billion loans acquired from Ulster bank Ireland. After the completion of the acquisition, PTSBG expects its CET 1 ratio to be in line with the Group’s management target of >14%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022)
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692. (23 June 2022) In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.
The sources of information used for this rating include Morningstar Inc. and Company Documents, PTSBG’s 2020 and 2021 Annual Reports, PTSBG’s H1 2021 and H1 2022 Interim Reports, PTSBG’s 2021 and H1 2022 Presentations, and PTSBG’s Company Announcements. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/406185
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: Elisabeth Rudman, Managing Director, Head of European FIG, Global FIG
Initial Rating Date: October 27, 2009
Last Rating Date: December 10, 2021
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