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Announcement:

Moody's extends its review on Irish Banks to further junior securities and to BFSRs

Global Credit Research - 02 Dec 2010

London, 02 December 2010 -- Moody's Investors Service has today announced that it has placed on review for possible downgrade the remaining ratings of Bank of Ireland (BoI), Irish Life & Permanent (IL&P) and Allied Irish Banks (AIB) which had not already been placed under review for possible downgrade, and the bank financial strength rating (BFSR) of EBS Building Society (EBS). The following ratings were placed on review for possible downgrade:

• Allied Irish Banks: The D bank financial strength rating (BFSR).

• Bank of Ireland: Dated subordinated debt (currently rated Ba1), junior subordinated debt (rated Ba3), cumulative Tier 1 debt (rated B1), non-cumulative preference shares (rated Caa1) and the D+ BFSR.

• EBS Building Society: The D BFSR.

• Irish Life & Permanent: Dated subordinated debt (currently rated Ba3), junior subordinated debt (rated B1), and the D BFSR.

All the other ratings of BoI, IL&P and AIB had been placed under review either in October or November, at which time the senior debt ratings of Anglo Irish Bank and of Irish Nationwide Building Society were also placed under review for possible downgrade (the junior debt ratings of those two banks are already based on an Expected Loss approach and rated at the lowest level, C). The Ca rating of non-cumulative Tier 1 instruments of EBS (issued through EBS Capital No1 S.A.) is unaffected by this action.

Ross Abercromby, Vice President and lead analyst for Irish banks at Moody's said: "While the November 28 EU/IMF support package for Ireland announced sizeable capital injections and a contingent capital fund for these banks, the December 1 confirmation by the Irish government that legislation will be introduced to enable losses to be imposed on subordinated debt significantly increases the potential for losses on the junior securities. The EU/IMF announcement also reaffirmed the government's intention to restructure the Irish banking system. While such a restructuring would strengthen the overall position of the system, it leaves each of the banks, individually, in an uncertain position. In addition, notwithstanding the solvency support the package contained, all of these banks remain highly dependent on external support for day to day funding. In response we are placing on review for possible downgrade the ratings of the junior securities of BoI and IL&P and the financial strength assessments of the four banks."

RATING RATIONALE ON JUNIOR SECURITIES

The pressure to share some of the capital burden of the Irish government with more junior creditors has increased significantly, in view of the strain which the sizeable capital injections place on the Irish government's finances. As a result the government announced on September 30 that it would introduce legislation that would allow losses to be imposed on subordinated debt, and this was reaffirmed on December 1. At this stage it is unclear which institutions will be included in the burden sharing but the decision will be based on the level of support and capital received from the government as well as the viability of the institutions in the absence of the support. The recent statements by the Irish government also discuss the potential for deeply discounted exchanges or buybacks along similar lines as the exchange offer at an 80% haircut to par for Anglo Irish Bank. Any such exchange would very likely be viewed as a distressed exchange by Moody's.

The most likely outcome of the review is therefore that the ratings for these junior securities will be placed in the low single 'B' or 'Caa' range, a rating level more commensurate with our view on the probability of impairments and expected loss that investors may potentially face. If distressed exchanges do take place or losses are imposed, the ratings could well be downgraded further, to reflect the actual level of loss incurred.

RATING RATIONALE FOR BANKS' STANDALONE RATINGS

The EU/IMF support package for Ireland and its banking system is positive for the capital profiles of the Irish banks, making available funds for bank recapitalisation that will in turn provide a significantly improved buffer to absorb any future loan losses. This is intended to instill greater investor confidence and underpin the banks' financial fundamentals. The announcement also reaffirmed the government's intention to restructure the Irish banking system. While such a restructuring would strengthen the overall position of the system, it leaves each of the banks, individually, in an uncertain position. Therefore the review will assess the impact of the planned reorganisation (to the extent any details become available) on each of the banks' franchise value and credit profile. More generally, the operating environment for the Irish banks remains highly volatile and uncertain and therefore the review will also assess the implications of this for banks' asset quality and earnings performance in the medium term.

However, all four banks remain under significant short-term funding pressure, and highly reliant on external support. The review process will therefore also focus on the liquidity profiles of the banks and in particular whether the recapitalisation can re-open their access to the capital markets, thereby reducing their high reliance on central bank funding.

Consistent with Moody's definitions, for banks which, following that review, we expect to need material on-going support, the stand-alone BFSR could be placed as low as the E+ range (translating to B1 -- B3 on the long-term scale), at least until the need for on-going support has diminished.

OTHER BANKS

The ratings of the other Irish banks are unaffected by this rating action as they are not going to be supported as part of this package and the rating uplift 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). None of these banks have participated in the Irish government's guarantee schemes.

PREVIOUS RATING ACTIONS AND METHODOLOGIES

Moody's last rating action on Bank of Ireland, EBS Building Society and Irish Life & Permanent was on November 25, 2010 when the short-term bank deposit and debt ratings were placed on review for possible downgrade. In addition the dated subordinated debt of EBS, and the dated subordinated debt, junior subordinated debt, cumulative Tier 1 securities and non-cumulative preference shares of Allied Irish Banks were also placed on review for possible downgrade.

The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007.

London
Johannes Wassenberg
MD - Banking
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 Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom

Moody's extends its review on Irish Banks to further junior securities and to BFSRs
No Related Data.
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