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 all the ratings remains Stable. The Bank’s Intrinsic Assessment (IA) is A (low) and the Support Assessment remains at SA1. The Support Assessment is SA3. See the full list of ratings in the table at the end of this press release.
KEY RATING CONSIDERATIONS
The confirmation of the ratings reflects AIB’s robust retail franchise in Ireland, where the Bank is a leading institution with meaningful market shares, as well as the Bank’s sound funding and liquidity position, and solid capitalisation, with ample cushions over regulatory minimum requirement.
The rating action also takes into account the Bank’s improving profitability, which in DBRS Morningstar’s view should further benefit from the higher interest rate and consolidating Irish banking environment, as well as the significant progress that the Bank continues to make in reducing the level of non-performing loans (NPLs) through both organic recoveries and portfolio sales.
DBRS Morningstar considers the acquisition by AIB of some portfolios of Ulster Bank Ireland DAC (Ulster Bank), the Irish subsidiary of NatWest Group, to have manageable integration risks and capital impact, and as a result it views AIB as well positioned to further strengthen its franchise and reinforce its profitability, despite the uncertain operating environment of high inflationary pressures and global economic slowdown.
The Long-Term ratings would be upgraded if the Bank demonstrates consistent improvement of underlying profitability and asset quality whilst maintaining its strong capital position.
A downgrade of the Long-Term ratings would likely be driven by a significant asset quality deterioration materially impacting capitalisation.
Franchise Combined Building Block (BB) Assessment: Good
AIB is a leading retail and commercial bank in Ireland and one of the two predominant Irish financial institution groups. The Bank benefits from some of the largest market shares in Ireland including around 31% market share in mortgages and 39% in SME loans. AIB also operates in the UK, offering corporate and commercial banking in Great Britain (GB) and retail and business activities in Norther Ireland. In Ireland, AIB is pursuing inorganic growth opportunities after the exit of Ulster Bank and KBC, and has already bought two loan portfolios from Ulster Bank including a EUR 3.7 billion portfolio of corporate and commercial loans and EUR 5.7 billion of performing tracker mortgages. 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
AIB’s earnings profile has substantially improved after the removal of all the COVID-19 restrictions in January 2022 and DBRS Morningstar believes the Bank is well positioned to keep benefitting from robust banking activity, the rise in interest rates since July 2022 and the consolidating Irish banking environment following the exit announcements by KBC and Ulster Bank. In H1 2022, the Bank reported net profit of EUR 477 million, 74% higher YoY, mainly supported by a significant release of loan loss provisions and stronger core banking revenues. Operating income benefitted from higher banking activity, with net fees and commissions growing 19% YoY on a like for like basis, thus excluding Goodbody. However, DBRS Morningstar notes that the Bank is well positioned to benefit from the higher interest rate environment which should boost its NII and earnings generation in 2023. The loan loss reversals reflected the improved macroeconomic assumptions in the Bank’s credit models as well as improved credit quality and stage transfers. Underlying operating expenses, on a like for like basis, remained very controlled with a minimal increase of 1% YoY in H1 2022. Including the bank levies and regulatory fees, the underlying cost-income ratio of AIB was 69% in H1 2022. In June 2022, the Central Bank of Ireland concluded the examination of the tracker mortgages and AIB agreed to pay a fine of EUR 96.7 million to close the investigation, however, impact on profitability was moderate, as EUR 70 million had already been provisioned.
Risk Combined Building Block (BB) Assessment: Good / Moderate
DBRS Morningstar views AIB as having a moderate credit risk, primarily stemming from its lending portfolio. AIB has achieved substantial progress over the last decade in reducing its stock of non-performing loans (NPLs) both through organic recovery and asset sales and this is a key consideration for the rating. At end-2021, asset quality improved to its pre-pandemic COVID-19 levels and has substantially strengthened further in 9M 2022. The NPL ratio reduced to 3.9% in 3Q 2022 from 5.35% at end-2021 and 7.33% at end-2020, largely driven by a substantial reduction of NPLs through NPL portfolio sales and organic cures. The improvement in asset quality was also notable in the steady reduction of Stage 2 loans (down 34% since end-2020). The NPL coverage ratio remained strong at 58% of total NPLs at end-1H 2022.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views AIB's funding profile as robust and stable, underpinned by the Bank's large and growing customer deposit base which accounted for 84% of total non-equity funding at end-H1 2022. Customer deposits grew to EUR 97.3 billion at end-Q3 2022, up by 5% compared to end-2021, partly benefitting from the banking sector consolidation in Ireland with the exit of Ulster Bank and KBC. The net loan-to-deposit ratio stood at 60.7% at end-Q3 2022 vs. 60.8% at end-2021 and 69% at end-2020. The Bank’s funding profile is also well diversified by maturity and instrument, including T-LTRO, Euro Medium Term Notes, Global Medium Term Notes, securitization notes and subordinated liabilities. In 2022, the Bank issued four MREL related securities for a total amount of c. EUR 3.22 billion, including USD and EUR issues. AIB’s liquidity profile is strong, supported by an immediately available liquidity pool of assets of EUR 51.6 billion at end-H1 2022, up from EUR 49.8 billion at end-2021 and EUR 43.8 billion at end-2020. At end-H1 2022 the Bank reported a strong liquidity coverage ratio (LCR) of 215% and a net stable funding ratio (NFSR) of 164%.
Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
AIB has a sound capital position supported by an improving capacity to generate earnings and it has ample cushions over regulatory minimums. At end-Q3 2022, AIB reported a fully-loaded CET1 ratio of 15.4% compared to 16.6% at end-2021, but in excess of the CET1 ratio management target of above 13.5%. The decline mainly stemmed from an increase in RWAs after the integration of Ulster Bank’s corporate and commercial loan portfolio (-130 bps) and a dividend charge against 2022 results. The Bank continues to maintain a significant capital buffer against the minimum capital requirement which is deemed adequate to navigate the current operating environment as well as inorganic growth opportunities. The minimum CET1 ratio requirement is 11.05% in 2023. DBRS Morningstar expects AIB’s capital cushion to remains solid after the completion of the Ulster tracker mortgage portfolio, which is expected to increase RWAs by EUR 2.5 billion and have a negative impact of 60 bps.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/408423
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 (23 June 2022) https://www.dbrsmorningstar.com/research/398692 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, AIB’s Annual Report 2020 and 2021, AIB’s Interim Reports H1 2021 and H1 2022, AIB’s Presentations 2021 and H1 2022, AIB’s Q3 2022 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.
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/408424
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: María Jesús Parra Chiclano, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Head of Global FIG
Initial Rating Date: October 20, 2005
Last Rating Date: January 14, 2022
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