London, 01 April 2011 -- Moody's Investors Service has today commented that there is no impact
on the senior or standalone ratings of four domestic Irish banks following
the announcement of new capital requirements published yesterday by the
Central Bank of Ireland (CBI) and the Irish government. The four
domestic Irish banks that have remained as going concerns have been subjected
to a Prudential Capital Assessment Review and a Prudential Liquidity Assessment
Review (PCAR and PLAR respectively). The four banks are Bank of
Ireland (BoI, rated Ba1 on review for possible downgrade / Not-Prime
for senior debt, Baa2 on review for possible downgrade / P-2
for bank deposits and a BFSR of D, mapping to Ba2 on the long-term
scale), Allied Irish Banks (AIB), EBS Building Society (EBS)
and Irish Life & Permanent (IL&P). AIB, EBS and IL&P
are all rated Ba2 on review for possible downgrade / (P) Not-Prime
for senior debt, Baa3 on review for possible downgrade / P-3
for bank deposits and a BFSR of D-, mapping to Ba3 on the
long-term scale.
Moody's does not envisage rating implications for the standalone
Bank Financial Strength Ratings (BFSRs), due to the PCAR and PLAR
results. This is for two reasons:
1. The overall losses that the CBI is incorporating into the capital
requirements for the four institutions are in line with those that Moody's
has been using in its own scenario analysis (the overall three year provision
charge of EUR27.7 billion compares to Moody's expected losses
of approximately EUR32 billion).
2. The standalone ratings of the four banks (D for BoI, mapping
to Ba2 on the long-term scale and D- for AIB, EBS
and IL&P, mapping to Ba3) already incorporated a significant
recapitalisation of up to EUR35 billion in total that had been made available
under the EU/IMF support package .
In addition there is no impact at present on the senior unsecured debt
and deposit ratings of the four institutions. These ratings were
placed on review for possible downgrade on February 11, 2011 and
the review is focused on assessing the new government's stance towards
senior creditors and on Moody's assumptions of the likelihood of
further systemic support being forthcoming, if it is needed in the
future. Moody's aims to complete this review in the coming
weeks. In an earlier rating action today, Moody's has
downgraded the dated subordinated debt and the junior subordinated debt
of IL&P to Ca and Ca (hyb) from B2 and B3 (hyb) respectively (see
"Moody's downgrades Irish Life & Permanent's subordinated debt
to Ca" for more details).
CAPITAL STRESS TESTS AND LIQUIDITY REVIEW RESULTS ANNOUNCED
On March 31, 2011 the CBI announced that, following the completion
of the Prudential Capital Assessment Review (PCAR) and the Prudential
Liquidity Assessment Review (PLAR), the four banks total gross capital
requirement is EUR24 billion. In line with the conditions of the
EU/IMF support package, the CBI carried out the PCAR and PLAR in
conjunction with private-sector input.
The PCAR stress tests have been used to provide three-year (2011-2013)
provision charges for the banks. This includes provision charges
on the assets to be deleveraged as part of the PLAR process. The
capital levels have been set such that the banks must have a 6%
core tier 1 ratio after the adverse stress and a 10.5% core
tier 1 ratio after the base-case scenario. The adverse stress
-- which incorporates a 60% peak-to-trough
fall in residential house prices and a 70% fall in commercial property
values -- leads to a total provision charge for the four
banks of EUR27.7 billion over the three year period.
The total capital requirement of EUR24 billion includes a buffer of EUR2.3
billion and a further EUR3 billion of contingent capital to protect against
losses beyond the 2011-2013 period. Including these,
the capital requirement is split as follows: AIB (EUR13.3
billion), BoI (EUR5.2 billion), EBS (EUR1.5
billion) and IL&P (EUR4 billion). Although Moody's would
expect that some of this capital will be raised through the disposals
of subsidiaries (especially in the case of IL&P), potentially
from existing shareholders (in the case of BoI) and further burden sharing
with subordinated bondholders, the Irish government is likely to
provide most of the capital. However, the government has
indicated that burden sharing with senior unsecured debt holders is not
part of this recapitalisation.
NO IMPACT ON STANDALONE RATINGS AT PRESENT
As discussed above Moody's does not envisage rating implications
for the standalone BFSRs as both the losses that the CBI is incorporating
into the capital requirements for the four institutions are in line with
those that Moody's has been using and the recapitalisation measures
(up to EUR35 billion in total) provided in the EU/IMF support package
have also already been incorporated.
Furthermore, the BFSRs continue to reflect these additional considerations:
(i) the significant short-term funding pressures that the banks
are under that has led to the high reliance on external funding support;
and (ii) the uncertain operating environment, which means that asset
quality and earnings are likely to remain extremely weak. Furthermore,
Moody's considers that the deleveraging process could further exacerbate
asset quality and earnings pressures.
No deadline has been provided by which the capital must be raised and
Moody's assumes that the capital will be injected in the near future.
However, if the capital is not forthcoming for any reason,
then the BFSRs would likely come under downward pressure.
A key factor in any future upward pressure on BFSRs will be whether these
measures can now begin to restore confidence in the Irish banking system.
However, for the foreseeable future, Moody's expects
that the banks will continue to face funding difficulties and therefore
the ongoing liquidity support from the Eurosystem remains vital.
Moody's considers that the announcement by the ECB that it will
now accept all debt instruments backed by the Irish government as collateral
against ECB loans as a credit positive for the banking sector.
SENIOR RATINGS REMAIN ON REVIEW FOR POSSIBLE DOWNGRADE
The senior unsecured debt ratings (Ba1/N-P for BoI and Ba2/(P)N-P
for AIB, EBS and IL&P) and the bank deposit ratings (Baa2/P-2
for BoI and Baa3/P-3 for AIB, EBS and IL&P) of the four
institutions were placed on review for possible downgrade on February
11, 2011. The review is focussed on assessing the new government's
stance towards senior creditors and on Moody's assumptions of the
likelihood of further systemic support being forthcoming should it be
needed in the future. Moody's aims to complete this review
in the coming weeks.
RESTRUCTURING OF THE BANKING SECTOR INCLUDES MERGING EBS INTO AIB
The government has also announced its intention to reduce in size and
restructure the Irish banking system. Moody's understands
that this will be achieved in two ways (i) the PLAR process will reduce
the size of the balance sheets through deleveraging and reduce the banks'
loan-to-deposit ratios to below 122.5%;
and (ii) merging EBS into AIB will leave two full service banks (BoI and
AIB/EBS) together with a restructured IL&P.
The objectives of the PLAR are to deleverage the banking system,
reducing the reliance on short-term funding and preparing the banks
for the new Basel III liquidity requirements. The banks have therefore
identified over EUR70 billion of non-core assets to be sold or
run-off over the period to 2013. This will enable the banks
to meet the 122.5% loan to deposit ratio target, also
by end-2013. The banks will be split into core and non-core
divisions, with governance structures put in place to ensure that
the non-core business is managed in a way that the loan-to-deposit
ratio targets are met.
Moody's views the plans to deleverage the system as credit positive,
as it will reduce the high reliance on central bank funding. However,
the rating agency noted that a large part of the assets to be sold are
in the UK. Given that there are substantial other assets to be
sold in the UK over a similar timeframe, this may prove challenging.
The proposed merger of EBS into AIB is unlikely to have any rating implications
as the two institutions currently have the same ratings and any merger
is unlikely to happen until they have been recapitalised. Moody's
will comment further on this when additional details become available.
ANGLO IRISH AND IRISH NATIONWIDE BUILDING SOCIETY
Neither Anglo Irish Bank (Anglo Irish) nor Irish Nationwide Building Society
(INBS) were included in the PCAR and PLAR process (both banks are rated
Caa1 on review for possible downgrade/Not-Prime for senior debt
and bank deposits with BFSRs of E, mapping to Caa1 on the long term
scale).
Moody's understands that a further assessment of the capital requirements
for Anglo Irish and INBS will be completed in May. If at that time
further capital is required, the government has stated that it will
discuss with the authorities a timeframe and means to provide that capital.
London
Ross Abercromby
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
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London
Johannes Wassenberg
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
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SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
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Moody's comments on Irish Banks following announcement of new capital requirements; no impact on senior ratings