Outlook is negative
London, 12 February 2009 -- Moody's Investors Service has today downgraded the long-term senior
debt and bank deposit ratings of Allied Irish Banks plc (AIB) to Aa3 from
Aa2. The bank's financial strength rating (BFSR) was lowered
to C (mapping to a baseline credit assessment - "BCA"
- of A3) from B- (BCA of A1). Subordinated debt and
preferred stock of the bank are downgraded to A1 and A2 respectively and
the backed preferred stock of the bank's subsidiaries has also been downgraded
to A2. This concludes Moody's review of the bank's ratings initiated
on 18 November 2008. The short term debt and deposit ratings were
affirmed at Prime-1. The senior debt covered by the Irish
government guarantee maturing prior to September 29 2010, rated
Aaa with a negative outlook, is unaffected by this action.
Ross Abercromby, Vice President/Senior Analyst and the lead analyst
for this bank at Moody's said that "the downgrade reflects Moody's
expectation of a substantial increase in impairments in Ireland and,
to a lesser extent in the UK, especially from the relatively large
exposure to property and construction. In addition the slowdown
in the bank's major markets is likely to result in lower profitability
reducing the bank's ability to generate capital and reserves internally."
Moody's downgrade of the bank's long-term rating to
Aa3 reflects the weaker BFSR, but also incorporates the rating agency's
view on the long-term probability of very high ongoing support
from the Irish Government as evidenced by the announcement of a EUR3.5
billion preference share investment in the bank as well as the two year
government guarantee (See "Moody's assigns backed-Aaa ratings
to certain debt securities covered by the Irish government's guarantee"
published on November 7 2008").
DOWNGRADE OF THE BFSR TO C
In the bank's loan books, Moody's considers that impairments in
the commercial property and corporate loan books will accelerate due to
the depth of the recession in both Ireland and the UK and the expectation
of a rise in unemployment. This is reflected in the negative outlook
for credit conditions that Moody's has on both the Irish and UK
banking sectors. Moody's does however consider the bank's retail
mortgage lending book to be relatively conservatively positioned although
noted that similar to other Irish banks the level of buy-to-let
lending is high. The bank's exposure to construction and
property is EUR49 billion and in particular Moody's would expect
substantial impairments to arise on the EUR10 billion Irish residential
development book. Outside of Ireland and the UK, Moody's
expects that the bank will report higher impairments in Poland as the
impact of the credit crunch begins to affect banks in Central Europe.
At the bank's current rating level we consider the tolerance for further
impairment charges and losses to be around EUR6 billion, assuming
a reduction in pre-provision income of up to 25%.
Losses above this level would increase the downward rating pressure.
Moody's estimates that the EUR3.5 billion preference share
investment in the bank by the Irish Government will have the impact of
increasing the bank's Tier 1 capital ratio to approximately 10%
and will provide a further buffer against the expectation of further losses.
However Ross Abercromby noted that "while the action announced by
the Irish Government is viewed positively it will increase the non-equity
component of the bank's capital base, and Moody's views this type
of capital as lower quality than common equity." The negative
outlook on the C BFSR reflects the remaining significant uncertainty associated
with potential further impairments beyond Moody's base stress assumptions
given the difficult economic environment in the bank's main markets.
DOWNGRADE OF THE LONG-TERM SENIOR RATINGS TO Aa3 FROM Aa2
Moody's downgraded to Aa3 from Aa2 the senior long-term debt and
deposit ratings of AIB, with a negative outlook. This reflects
the downgrade in the BFSR as well as the continuing importance of the
bank to the Irish banking system and Moody's assessment that potential
support for the bank remains very high. This results in three notches
of uplift from the A3 baseline credit assessment. The negative
outlook reflects that a further downgrade of the bank's BFSR would
likely lead to a similar action on the long-term senior ratings.
DOWNGRADE OF BANK ZACHODNI WBK
The local currency long-term bank deposit rating of AIB's
Polish subsidiary Bank Zachodni WBK S.A. (BZWBK) was downgraded
to A2 from A1. The outlook is now stable. The bank's A2
foreign currency long-term bank deposit rating, the Prime-1
short-term bank deposit ratings and the C- BFSR (mapping
to a BCA of Baa1) were not affected by this action.
Moody's previous rating action on BZWBK was on November 18, 2008
when the A1 local currency long-term bank deposit rating was placed
on review for possible downgrade and the outlook on the C- BFSR
was changed to stable from positive.
DETAILS OF THE GOVERNMENT RECAPITALISATION PACKAGE
The preference shares issued by the bank have a fixed dividend of 8%
payable in cash or ordinary shares in lieu, and they can be repurchased
at par value within five years or at 125% of the par value after
this. The preference shares also have warrants attached to them
and this provides the Irish government with the option to purchase up
to 25% of the ordinary equity (at the time of the EUR3.5
billion preference share issuance) of the bank in five years time,
potentially providing a significant return. However if the bank
redeems up to EUR1.5 billion of these preference shares by replacing
them with new core tier 1 capital, before year-end 2009,
then the warrants can be reduced but not below 15% of the ordinary
equity of the bank.
In addition as part of this investment the Irish government can appoint
up to 25% of the directors of the bank and receives 25%
of the total ordinary voting rights in respect of change of control and
board appointments.
Moody's also noted that the Irish government plans to examine how
the current guarantee scheme can be restructured to allow the covered
banks to issue longer-term debt, and that it is investigating
proposals for dealing with the high-risk land and property development
lending that has been carried out by many of the Irish banks.
The following ratings were downgraded:
Allied Irish Banks plc:
Bank financial strength rating: to C from B-
Long-term bank deposits: to Aa3 from Aa2
Senior unsecured debt: to Aa3 from Aa2
Subordinated debt: to A1 from Aa3
Junior subordinated debt: to A1 from Aa3
Preference stock: to A2 from A1
AIB North America Inc:
Long-term bank deposits: to Aa3 from Aa2
Senior unsecured debt: to Aa3 from Aa2
AIB UK 1 LP:
Backed preferred stock: to A2 from A1
AIB UK 2 LP:
Backed preferred stock: to A2 from A1
AIB UK 3 LP:
Backed preferred stock: to A2 from A1
Bank Zachodni WBK S.A.
Local currency long-term bank deposits: to A2 from A1
The following ratings were affirmed:
Allied Irish Banks plc:
Short-term bank deposits: Prime-1
Short-term debt: Prime-1
Backed senior unsecured debt: Aaa
AIB North America Inc:
Commercial Paper: Prime-1
Allied Irish Banks, NY:
Backed LT Deposit Note/CD Program: Aaa
Short-term bank deposits: Prime-1
Bank Zachodni WBK S.A.
Foreign currency long-term bank deposits: A2
Short-term bank deposits: Prime-1
Bank financial strength rating: C-
The principal methodologies used in rating this issuer were "Bank Financial
Strength Ratings: Global Methodology" (February 2007) and "Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology" (March 2007), which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found in the Credit Policy & Methodologies directory.
The last rating action on AIB was on November 18, 2008 when the
bank's BFSR and long-term ratings were placed on review for
possible downgrade.
Headquartered in Dublin, Ireland, Allied Irish Banks reported
consolidated assets of EUR183 billion at year end 30 June 2008.
London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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
Moody's downgrades Allied Irish Bank to Aa3/C
