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Announcement:

Moody's comments on Irish Banks following announcement of new capital requirements; no impact on senior ratings

01 Apr 2011

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.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Johannes Wassenberg
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's comments on Irish Banks following announcement of new capital requirements; no impact on senior ratings
No Related Data.
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