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Rating Action:

Moody's takes action on rated Irish Banks further to sovereign rating review

06 Oct 2010

Government guaranteed debt placed on review for possible downgrade; subordinated debt downgraded

London, 06 October 2010 -- Moody's Investors Service has today announced rating actions on several Irish banks and building societies, further to the rating agency's decision to place the Irish government's Aa2 bond rating on review for possible downgrade and the Irish authorities' announcement on 30 September 2010 that they are working on a resolution and reorganisation legislation to allow burden-sharing by subordinated bondholders. The rating actions are as follows:

• Moody's has placed on review for possible downgrade the ratings of all government-guaranteed long-term debt issued by Irish banks that are covered by the Eligible Liabilities Guarantee scheme (ELG). This refers to the backed-Aa2 rated senior debt of five institutions: Allied Irish Banks ("AIB"), Anglo Irish Bank Corporation (Anglo Irish), Bank of Ireland ("BoI"), EBS Building Society ("EBS"), and Irish Life & Permanent ("IL&P")

• Moody's has placed on review for possible downgrade the long-term bank deposit and debt ratings of: AIB (rated A1), BoI (A1), EBS (A3), ICS (A2) and IL&P (A3).

• Moody's has also placed on review for possible downgrade the Prime-1 short-term ratings of AIB and ICS.

• The direction of the review on the Baa3/Prime-3 bank deposit and senior debt ratings of Irish Nationwide Building Society (INBS) has been changed to review for downgrade from the previous review with direction uncertain.

• Moody's has downgraded the dated subordinated debt (Lower Tier 2) of Anglo Irish to C from Caa1, and that of INBS from Ba1 to C.

• Moody's has downgraded the dated subordinated debt of the other banks as follows: AIB downgraded to Ba3 from A2; BoI downgraded to Ba1 from A2; EBS downgraded to Ba3 from Baa2; IL&P downgraded to Ba3 from Baa1; Ulster Bank Ireland Limited ("UBIL") downgraded to Baa3 from A3; and KBC Bank (Ireland) ("KBCI") downgraded to Ba1 from Baa3.

• Moody's has downgraded the junior subordinated debt of AIB and IL&P to B1 from Ba3.

• Moody's has changed to stable from positive the outlooks on the D Bank Financial Strength Ratings (BFSRs) of AIB and EBS.

• Moody's has withdrawn the 'Backed' Prime-1 short-term Issuer Rating of INBS.

RATINGS RATIONALE

"The review for possible downgrade of most Irish banks' senior debt ratings follows Moody's earlier action on the Irish government debt rating as these bank ratings incorporate a high level of credit enhancement associated with government support," explains Ross Abercromby, Vice President - Senior Analyst in Moody's Financial Institutions Group and the lead analyst for Irish Banks.

Moody's notes the very clear determination by the Irish government to contain support to senior creditors and to ask subordinated debt investors to share the burden of the current restructuring and recapitalisation of the banks. "While only the subordinated debt of Anglo Irish and INBS is currently directly affected by the government's actions, Moody's has removed any expectation of systemic support from this debt class in Ireland based on the rating agency's view that the likelihood of future government support for this debt class is at best speculative," says Mr. Abercromby.

Please refer to the sections below for a more detailed rationale for each individual rating action.

GOVERNMENT GUARANTEED DEBT

Moody's has placed the backed-Aa2 rated senior debt of the five institutions -- AIB, Anglo Irish, BoI, EBS and IL&P -- that have issued public debt under the Eligible Liabilities Guarantee scheme (ELG) on review for possible downgrade. This action follows the placing of the Aa2 Irish Government Bond rating on review for possible downgrade (See "Moody's places Ireland's Aa2 rating on review for possible downgrade" published on 5 October 2010). The backed-Aa2 ratings assigned are based on the unconditional and irrevocable guarantee from the Irish government (See "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.)

SENIOR DEBT AND DEPOSIT RATINGS

As a result of the review for possible downgrade of the Irish government bond rating, the long-term bank deposit and debt ratings of AIB (A1), BoI (A1), EBS (A3), ICS (A2) and IL&P (A3), and the Prime-1 short-term bank deposit and debt ratings of AIB and ICS have been placed on review for possible downgrade. These institutions all currently benefit from an extremely high level of support (ranging from five to seven notches of uplift from the banks' stand-alone ratings). Therefore, the review of the banks' deposit and debt ratings will take into account the government's ability and willingness to support its banking system following the outcome of the review of the government bond rating.

The review of the Baa3/Prime-3 bank deposit and senior debt ratings of INBS has been changed to "review for possible downgrade" from "review with direction uncertain". The review with direction uncertain had focused primarily on the planned sale of the institution, which could result in either an upgrade or a downgrade depending on the details of the transaction and the credit quality of the potential purchaser. However, the change in the direction of the review to "possible downgrade" reflects (i) the slow process of the planned sale. This may be further delayed by uncertainties created by the reorganisation and resolution legislation to allow burden sharing with subordinated creditors; (ii) a potential lower degree of systemic support following the expiry last week of the blanket guarantee on senior and dated subordinated debt, which had underpinned the Baa3 ratings.

There are no changes to the senior ratings of Anglo Irish Bank and the review for possible downgrade on the bank's Baa3/P-3 debt and the A3/P-1 bank deposit ratings will continue.

DOWNGRADE OF DATED AND JUNIOR SUBORDINATED DEBT

On 30 September 2010, the Irish authorities announced that they are working on a resolution and reorganisation legislation to allow burden-sharing by subordinated bondholders. As a result of this, the dated subordinated debt rating of Anglo Irish and INBS has been downgraded to C, indicating the likelihood of a substantial loss. This action concludes the review with direction uncertain on the dated subordinated debt of INBS, originally initiated by Moody's on 9 December 2009 and maintained on 21 July 2010.

In addition, the dated subordinated debt ratings of the other Irish domiciled banks, and the junior subordinated debt ratings of AIB and IL&P, have been downgraded. In the case of IL&P, the ratings have been downgraded from Baa1 to Ba3, and in one instance from A3 to Ba3; due to a clerical error, the single debt issue had been rated A3 as opposed to Baa1. These actions have been prompted by the rating agency's concern that support may not be extended to these instruments in the case of financial distress following the government's recent statements.

Previously, Moody's ratings on Irish banks' dated subordinated debt had generally reflected an expectation of systemic support for these instruments in a going-concern scenario. This was primarily based on the legal framework in Ireland preventing a different treatment of dated subordinated and senior unsecured debt outside of a liquidation of the issuer. The announcement by the Irish government to introduce resolution and reorganisation legislation will, in Moody's understanding, enable a different treatment of dated subordinated debt outside of a liquidation. While this legislation is being introduced to share the cost of supporting Anglo Irish and INBS with subordinated creditors, this establishes in Moody's view a precedent for the treatment of subordinated debt of other banks in case that government support is required in the future.

As a consequence, Moody's has removed any systemic support from the ratings of these instruments, which are now more closely aligned to the banks' standalone financial strength ratings (the BFSRs).With the exception of Anglo Irish and INBS, where the expected loss warrants a much lower rating (now C), the dated subordinated debt of the other banks is now rated one notch below their standalone rating (including any potential parental support). Due to its more junior position in the capital structure, junior subordinated debt is subsequently rated two notches below the banks' standalone rating.

CHANGE IN OUTLOOK ON THE BFSRs OF AIB AND EBS

The outlooks on the D BFSRs of AIB and EBS have been changed to stable from positive. In the case of AIB, this reflects several factors which, in Moody's opinion, limit the positive pressure on the bank's standalone creditworthiness. These include (i) the likely high level of losses that will be taken on the EUR4.4 billion of land and property assets that were previously to move to NAMA, but will now stay on the balance sheet of the bank; (ii) the ongoing sovereign difficulties that restrict the ability of the bank to issue medium term funding ; (iii) the likelihood of further austerity measures that could further impact a return to economic growth in Ireland; (iv) the need for new senior management (Chairman and Chief Executive) to be recruited; and (v) the overhaul of both the overall strategy and of the bank's underwriting and risk culture that is required. However, Moody's notes that further downward pressure on the BFSR is limited as a result of the EUR10 billion of capital that the bank is expected to raise in 2010 (of which EUR2.5 billion will be raised through the sale of the bank's Polish subsidiary), and that the bank's domestic franchise is likely to remain extremely strong.

The outlook on the D BFSR of EBS has also been changed to stable from positive. This reflects the ongoing economic issues in Ireland and the likelihood of further austerity measures that could further impact a return to economic growth in Ireland. The society is currently undertaking a process that will likely result in the sale of the society, and Moody's notes that this could lead to further rating actions depending on the acquirer and the structure of any acquisition.

As a result of the change of outlook on the BFSR of AIB and EBS, the outlook on the subordinated debt ratings has been changed to stable.

WITHDRAWAL OF THE PRIME-1 BACKED SHORT-TERM ISSUER RATING OF INBS

The original blanket guarantee established by the Irish government in September 2008 covered a wide range of liabilities. As a result, Moody's assigned a backed short-term issuer rating of Prime-1 to INBS reflecting that the institution's short-term debt and deposit obligations, maturing within the guarantee period, were guaranteed by Prime-1 rated Ireland. This guarantee expired on 29 September 2010 and, as a result, the backed short-term issuer rating assigned to INBS has been withdrawn.

The principal methodologies used in rating Irish banks 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. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's 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.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
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Moody's takes action on rated Irish Banks further to sovereign rating review
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