London, 20 December 2010 -- Moody's Investors Service has today downgraded the ratings of several
Irish banks further to last week's five-notch downgrade of
the Irish government's bond ratings to Baa1 with a negative outlook
from Aa2. Today's rating actions can be summarised as follows:
• Moody's has downgraded the bank deposit ratings, the
senior debt ratings, the bank financial strength ratings (BFSRs)
and most junior securities of Allied Irish Banks (Allied Irish),
Bank of Ireland (BoI), EBS Building Society (EBS), Irish Life
& Permanent (IL&P) and Irish Nationwide Building Society (INBS).
• Moody's has also downgraded the deposit ratings and BFSRs
of the subsidiaries of Bank of Ireland, ICS Building Society (ICS)
and Bank of Ireland (UK) (BoI UK).
• In addition, the senior debt and bank deposit ratings of
Anglo Irish Bank (Anglo Irish) have been downgraded.
• The debt guaranteed under the Irish government's Eligible
Liabilities Scheme has also been downgraded. This refers to the
backed senior debt of five institutions -- Allied Irish, Anglo
Irish, BoI, EBS and IL&P.
These actions conclude the reviews initiated in October, November
and December 2010.
For full details of the rating actions, please refer to the list
provided at the end of this release.
OVERALL RATIONALE
Moody's concludes that the banks' debt ratings are affected
by the downgrade of the Irish government, as the high degree of
systemic support from the government had so far largely mitigated the
pressure stemming from a much weaker standalone credit profile of these
banks. The downgrade of the Irish government to Baa1 reflects Moody's
view of the revised capacity of the government to extend support to its
banking sector -- over and above the contingency fund set aside as
part of the EU/IMF package. However, at this point Moody's
continues to assume a very high, willingness of the government to
provide such support for senior bondholders.
Commenting on the downgrade of the banks' standalone financial strength
ratings Ross Abercromby, Vice President and lead analyst for Irish
banks at Moody's Investors Service, said: "The
downgrade of the standalone ratings of BoI (to D), and of Allied
Irish, IL&P and EBS (to D-) reflects their ongoing high
reliance on external support for day-to-day funding,
the uncertain evolution of their respective franchises amidst an expected
far-reaching restructuring of the entire sector, and likely
further pressure on asset quality as a result of the government's
austerity measures. These challenges are only partially offset
by the significant recapitalisation of these banks, which in itself
is a clear credit positive."
RATING RATIONALE FOR DOWNGRADE OF SENIOR DEBT
The senior unsecured debt ratings of Allied Irish, BoI, EBS
and IL&P have been downgraded by three to five notches to Baa2 (BoI)
and Baa3 (Allied Irish, EBS, IL&P). The outlook
on these ratings is negative in line with the outlook on the government
bond rating and on the BFSRs.
Moody's views these four institutions as being systemically important
for the Irish government as evidenced by the substantial support that
they have received over the past two years. While the senior ratings
have been downgraded as a result of the downgrade of the Irish Government
(Moody's measures the Irish government's ability to support
its banks at the same level as Ireland's own debt rating),
the senior obligations of these bank's continue to benefit from
three notches of uplift from the bank's stand-alone ratings
and continue to be investment grade. This is due to a combination
of several factors:
(i) In addition to the EUR8 billion of capital that will be injected into
the four banks (Moody's notes that some of this capital may be raised
privately), the EU/IMF package has provided a structure that will
allow the Irish government to call on a EUR25 billion contingency fund
if further capital is required. In Moody's view, this
would cover all of the lifetime losses of these four banks both in Moody's
base and stress case scenarios.
(ii) Moody's expects that, over the foreseeable future, Irish
banks are likely to continue to face very difficult conditions in the
wholesale markets and will therefore continue to rely on central bank
funding. In this regard, Moody's believes that the authorities
will remain a reliable source of funding for these four banks until progress
is made on the restructuring of the banking sector and market confidence
can be restored.
The senior debt ratings of Anglo Irish and INBS have been downgraded by
three notches to Ba3 (negative outlook) from Baa3. In line with
the downgrade of the other banks' senior ratings, these downgrades
reflect not only the reduced ability of the government to support the
senior debt in the future, but also the reduced systemic importance
of these banks as implied by the plans to wind them down over the longer
term. At the Ba3 level, the ratings continue to incorporate
significant systemic support (with a four-notch uplift from their
standalone rating). However, Moody's no longer considers
their credit profile to be commensurate with an investment-grade
rating.
Deposits at Anglo Irish and INBS are now rated Baa3 (negative outlook).
This reflects Moody's understanding that the deposits of the two
institutions are likely to be transferred or sold to other banks in the
system, the lowest of which are now rated Baa3.
The senior ratings do not incorporate the potential for a restructuring
of the debt. Moody's says that, in the event of a change
in the clear commitment by the Irish government to abstain from imposing
losses on senior creditors, it is likely that these ratings could
be further downgraded. In light of the negative outlook on all
the senior debt ratings, Moody's currently does not see any
upward rating pressure, which would most likely be conditional on
an upgrade of the government rating.
RATING RATIONALE FOR DOWNGRADE OF JUNIOR SECURITIES
As a result of the substantial support that the Irish government has provided
to the banking sector, and the strain which the sizeable capital
injections has placed on the Irish government's finances,
the government is introducing legislation that will allow losses to be
imposed on the subordinated liabilities of the six institutions covered
by the guarantee (Allied Irish, Anglo Irish, BoI, EBS,
IL&P and INBS). Moody's has therefore taken rating actions
on the subordinated liabilities of the four banks (all junior securities
at Anglo Irish and INBS are already rated C). For Allied Irish,
which will be almost fully owned by the government, and EBS which
is already 100% owned by the government, the junior securities
-- including in the case of Allied Irish the dated subordinated debt,
junior subordinated debt and Tier 1 securities -- have all been downgraded
to Ca. This reflects Moody's view that any exchange carried
out by these institutions would almost certainly be classified as a distressed
exchange. In the absence of an exchange, it is likely that
the government would impose losses.
Moody's believes that the situation differs for Bank of Ireland
and IL&P. IL&P has not received any state aid from the
government and its need for capital is deemed to be less than that of
the other institutions. As a result, the likelihood of losses
being imposed is lower. However, as the bank has received
substantial funding support in the form of the guarantees, use of
the legislation cannot be ruled out. Given this uncertainty,
Moody's has downgraded the dated subordinated debt to B2 and the
junior subordinated debt to B3, which are two and three notches,
respectively, below the bank's standalone rating. If
a distressed exchange was to take place or losses are imposed, Moody's
says that the ratings could well be downgraded further to reflect the
actual level of losses incurred.
Bank of Ireland has now completed an exchange offer on the majority of
its dated subordinated debt. Moody's has classified this
transaction as a distressed exchange and consequently has downgraded the
affected securities to Ca. In a few days the rating on these securities
will be upgraded to B2, in line with the rating of the dated subordinated
debt that is not included in the exchange offer. Although the B2
rating reflects Moody's view that the use of the legislation cannot
be ruled out, the rating agency believes that, as a result
of the exchange, this likelihood is lower than it is for Allied
Irish and EBS. This also reflects the fact that Bank of Ireland
has received less state aid, relative to the size of its balance
sheet. Junior subordinated debt and cumulative Tier 1 securities
of BoI have been downgraded to B3, while the non-cumulative
preference shares remain rated Caa1.
RATING RATIONALE FOR DOWNGRADE OF BANKS' STANDALONE RATINGS
In Moody's opinion, the EU/IMF support package for Ireland
and its banking system is positive for the capital profiles of Irish banks,
making available significant funds for bank recapitalisations that will
in turn provide a significantly improved buffer to absorb any future loan
losses. The aim is to instil greater investor confidence and underpin
the banks' financial fundamentals.
The government also reaffirmed its intention to restructure the Irish
banking system. While Moody's believes that such a restructuring
will strengthen the overall position of the system, the rating agency
notes that it leaves each of the banks, individually, in an
uncertain position. More generally, the operating environment
for Irish banks remains highly volatile and uncertain, and therefore
asset quality and earnings performance in the sector is likely to remain
extremely weak. In addition, the four banks remain under
significant short-term funding pressure, and are highly reliant
on external support. As a result of these factors, the standalone
BFSR of BoI has been downgraded to D (mapping to Ba2 on the long-term
scale) and the BFSRs of Allied Irish, IL&P and EBS have been
downgraded to D- (mapping to Ba3). The higher BFSR of BoI
reflects Moody's opinion that it is likely to be the first bank
to recover from the current crisis as a result of its stronger franchise
and stronger business model, and that it may need less restructuring
than some of the other banks. The rating outlook on the BFSRs is
negative, reflecting the difficult economic condition, the
funding issues and the challenges facing the banks to deleverage in a
difficult environment.
The BFSR of INBS has been downgraded to E (mapping to Caa1) as a result
of the plans to transfer the deposits out of the institution and wind
down the assets that remain on the balance sheet after the transfers to
NAMA. Moody's had previously expected the institution to
be sold as a whole. The outlook on INBS's E BFSR is stable.
RATING RATIONALE FOR DOWNGRADE OF GOVERNMENT-GUARANTEED DEBT
Moody's has downgraded the backed senior debt of the five institutions
-- Allied Irish, Anglo Irish, BoI, EBS and IL&P
-- that have issued public debt under the Eligible Liabilities Guarantee
(ELG) scheme to Baa1 (negative outlook) from Aa2. This action is
in line with the downgrade of the Irish government's bond rating
to Baa1 from Aa2. (Please refer to press release entitled "Moody's
downgrades Ireland to Baa1 from Aa2; outlook negative",
published on 17 December 2010.) The backed-Baa1 ratings
assigned are based on the unconditional and irrevocable guarantee from
the Irish government (Please refer to press release entitled "Moody's
to assign backed-Aa1/Prime-1 ratings to debt securities
covered by the Irish government's new guarantee", published on 7
January 2010.) In addition, in the case of the commercial
paper programme of AIB North America, Inc, the guaranteed
long-term rating is downgraded to Baa1 (negative outlook),
from A1. Due to a clerical error this had continued to be rated
A1 as opposed to the rating of the Irish government from the introduction
of the guarantee.
BANK OF IRELAND SUBSIDARIES DOWNGRADED TO Baa3/P-3
Given that ICS Building Society and Bank of Ireland (UK) are both highly
integrated subsidiaries of Bank of Ireland, they both have the same
standalone rating as BoI. Their BFSRs have therefore been downgraded
to D, with a negative outlook (mapping to Ba2 on the long-term
scale) from D+ (mapping to Baa3 on the long-term scale.)
The potential for parental support from Bank of Ireland, and in
the case of BoI (UK), the potential for systemic support from the
UK reflecting the importance of the deposit franchise it has as part of
its joint venture with the Post Office, has limited the downward
pressure on these institutions. As a result the bank deposit ratings
are downgraded to Baa3/P-3 for both institutions. The outlook
is negative, in line with that on BoI. In the case of ICS,
the negative outlook additionally reflects the need to sell the institution
over a multi-year period following negotiations with the European
Commission.
OTHER BANKS ARE UNAFFECTED BY TODAY'S ACTIONS
The ratings of the other Irish banks are unaffected by today's rating
actions as they are not being supported as part of the Irish government's
guarantee schemes. Instead, the rating uplift in their deposit
and senior debt ratings primarily stems from parental support.
These banks include KBC Bank Ireland (Baa2 negative; D-/Ba3
negative); Bank of Scotland (Ireland) (Baa1, negative;
D-/Ba3 negative); Ulster Bank Ireland (A2, negative;
D-/Ba3 negative); Zurich Bank (A1, review for possible
upgrade; D-/Ba3 negative); and Hewlett Packard International
Bank (A2, stable; C-/Baa1 stable).
Today's bank rating actions are as follows:
• Allied Irish Banks: Senior debt and bank deposits downgraded
to Baa3/P-3 from A1/P-1, dated subordinated debt to
Ca from Ba3, undated subordinated debt and cumulative Tier 1 securities
to Ca from B1, and non-cumulative preference shares to Ca
from Caa1. The BFSR is downgraded to D- (mapping to Ba3)
from D (Ba2). Government guaranteed debt is downgraded to Baa1/P-2.
The outlook is negative.
• Anglo Irish Bank: Senior debt downgraded to Ba3/Not-Prime
from Baa3/P-3 and bank deposits to Baa3/P-3 from A3/P-1.
Government guaranteed debt is downgraded to Baa1/P-2. The
outlook is negative.
• Bank of Ireland: Senior debt and bank deposits downgraded
to Baa2/P-2 from A1/P-1, dated subordinated debt to
B2 from Ba1, undated subordinated debt and cumulative Tier 1 securities
to B3 from Ba3. Non-cumulative preference shares remain
rated Caa1. The BFSR is downgraded to D (mapping to Ba2) from D+
(Baa3). Government guaranteed debt is downgraded to Baa1/P-2.
The outlook is negative. Dated subordinated debt currently being
exchanged is downgraded to Ca, but will be upgraded to B2 in a few
days.
• EBS Building Society: Senior debt and bank deposits downgraded
to Baa3/P-3 from A3/P-2, dated subordinated debt to
Ca from Ba3. Non-cumulative preference shares remain rated
Ca. The BFSR is downgraded to D- (mapping to Ba3) from D
(Ba2). Government guaranteed debt is downgraded to Baa1/P-2.
The outlook is negative.
• Irish Life & Permanent: Senior debt and bank deposits
downgraded to Baa3/P-3 from A3/P-2, dated subordinated
debt to B2 from Ba3, undated subordinated debt to B3 from B1.
The BFSR is downgraded to D- (mapping to Ba3) from D (Ba2).
Government guaranteed debt is downgraded to Baa1/P-2. The
outlook is negative.
• Irish Nationwide Building Society: Senior debt downgraded
to Ba3/Not-Prime from Baa3/P-3 and bank deposits are confirmed
at Baa3. The BFSR is downgraded to E (mapping to Caa1) from E+
(B3). The outlook is negative.
• Bank of Ireland (UK): Senior debt and bank deposits downgraded
to Baa3/P-3 from A3/P-2. The BFSR is downgraded to
D (mapping to Ba2) from D+ (Baa3).
• ICS Building Society: Senior debt and bank deposits downgraded
to Baa3/P-3 from A2/P-1. The BFSR is downgraded to
D (mapping to Ba2) from D+ (Baa3).
The principal methodologies used in this rating were Bank Financial Strength
Ratings: Global Methodology published in February 2007, Incorporation
of Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology published in March 2007, and Moody's Guidelines for
Rating Bank Hybrid Securities and Subordinated Debt published in November
2009.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
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.
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SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
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Moody's downgrades Irish Banks further to sovereign downgrade
