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Rating Action:

Moody's takes rating action on Irish Banks

20 May 2015

Action follows the introduction of the new bank rating methodology on 16 March 2015

London, 20 May 2015 -- Moody's Investors Service has today upgraded the ratings of three Irish banks: Allied Irish Banks, p.l.c. (AIB), Bank of Ireland (BoI) and Hewlett-Packard International Bank Plc (HPIB). The rating agency initiated the reviews on these banks on 17 March 2015 following the publication of its new bank rating methodology (see "Rating Methodology: Banks," 16 March 2015, available at moodys.com) to reflect both the new methodology, in particular the introduction of loss given failure analysis, and revisions in the agency's government support assumptions.

As a result, Moody's has today upgraded the long-term deposit ratings of

Allied Irish Banks, p.l.c. (AIB) to Ba1 from Ba2

Bank of Ireland (BoI) to Baa2 from Baa3

Hewlett-Packard International Bank Plc (HPIB) to A3 from Baa1

The agency has also upgraded the senior unsecured debt ratings of

AIB to Ba2 from Ba3

BoI to Baa2 from Ba1

In addition, following the recent update of the scorecard of the Irish government reflected in the credit opinion published on 18 May 2015 (https://www.moodys.com/research/Ireland-Government-of-Credit-Opinion--COP_423933) Moody's has changed Ireland's Macro Profile for banks to "Moderate+" from "Moderate" and affirmed the baseline credit assessments (BCAs) of AIB and BoI. As part of this action, Moody's also affirmed the BCA of Permanent tsb p.l.c. (PTSB), whose debt and deposit ratings were not included in this review.

For its own business reasons, Moody's has withdrawn the outlook on the ratings of AIB's and BoI's junior debt instruments.

Furthermore, Moody's assigned Counterparty Risk Assessments (CR Assessment) of

Baa3(cr) / P-3(cr) to AIB

Baa1(cr) / P-2(cr) to BoI

A2(cr) on review direction uncertian / P-1(cr) on review for downgrade to HPIB

Baa1(cr) / P-2(cr) to KBC Bank Ireland plc (KBCI)

Moody's said that today's rating actions follow the implementation of its new banking methodology and specifically the introduction of advanced Loss Given Failure (LGF) analysis and the agency's revised assumptions regarding government support.

These rating actions conclude the reviews on the deposit and issuer ratings initiated on 17 March 2015 for AIB and BoI. The action also incorporates the impact of the new bank rating methodology on the BCA, and deposit and debt ratings of HPIB. However, the BCA of HPIB remains on review with direction uncertain driven by the review on the rating of its parent company Hewlett-Packard Company (HP; Baa1, Review for Downgrade) and the potential for the bank to avoid a failure in the event of the default of its parent, warranting a BCA higher than that of HP's senior unsecured rating. Moody's says that these two drivers are unrelated to the implementation of the new banks rating methodology. Consequently, HPIB's long-term and short-term deposit ratings remain on review with direction uncertain in line with its BCA.

Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_181307 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

The new methodology includes a number of elements that Moody's has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution. These new elements capture insights gained from the crisis and the fundamental shift in the banking industry and its regulation.

In light of the new bank rating methodology, today's actions reflect the following considerations: (1) the "Moderate+" macro profile of Ireland; (2) the banks' financial profile and qualitative factors; (3) Moody's Advanced LGF analysis; and (4) the likelihood of government support for these institutions.

(1) CHANGE OF MACRO PROFILE FROM "MODERATE" TO "MODERATE+"

Irish banks benefit from a dynamic and open domestic economy with a very high level of wealth, which counterbalances the country's relatively small GDP.Moody's has changed Ireland's macro profile to "Moderate+" from "Moderate" to reflect improvements in banking supervision and regulation since the crisis, both by the Irish regulatory authorities and through the implementation of the Single Supervisory Mechanism (SSM) led by the European Central Bank (ECB). Susceptibility to event risk remains low, primarily because of external factors. However, despite the material deleveraging of the private sector over the past three years, the stock of private debt remains elevated and will continue to exert downward pressure on banks' credit fundamentals. Funding conditions have materially improved. Additionally, even though Ireland's banking system is highly concentrated, the barriers to entry are relatively low compared with other European countries.

(2) DIFFERENCES ACROSS IRISH BANKS' CORE FINANCIAL RATIOS

The Irish banks' BCAs, ranging from baa1 to caa1, reflect differences across the sector's core financial ratios, including aggregate high problem loan ratios, increasing capital buffers, improving profitability and manageable liquidity metrics. The financial factors of most Irish banks are improving on the back of a positive operating environment. However, legacy asset quality issues continue to be the main drag to recovery. The BCAs also reflect differences in product mix, and sector and single-name concentrations.

(3) PROTECTION OFFERED TO DEPOSITORS, SENIOR AND OTHER CREDITORS CAPTURED BY MOODY'S ADVANCED LGF LIABILITY ANALYSIS

Irish banks are subject to the EU Bank Resolution and Recovery Directive (BRRD), which Moody's considers to be an Operational Resolution Regime. The upgrade of the long-term deposit ratings of AIB, BoI and HPIB and senior unsecured ratings of AIB and BoI stems from the introduction of the rating agency's Loss Given Failure (LGF) analysis. Banks are increasingly benefiting from renewed access to the markets and have been able to issue instruments at different levels of the liability structure. The rating agency applies its standard assumptions to the three banks, assuming residual tangible common equity of 3% (8% for HPIB) and losses post-failure of 8% of tangible banking assets, a 25% run-off in junior wholesale deposits, a 5% run-off in preferred deposits, and a 25% probability of deposits being preferred to senior unsecured debt. Moody's also assumes that the junior proportion of deposits of these three banks is in line with its estimated EU-wide average of 26%.

4) DECLINE IN THE LIKELIHOOD OF GOVERNMENT SUPPORT

At the same time, Moody's says that the introduction of the BRRD has demonstrated a reduction in the willingness of EU governments to bail-out banks, and this has led to a lower likelihood of government support for Irish banks, in Moody's view. The rating agency reduced its assumption of government support for AIB and BoI to "moderate" from "high" for their debt and deposit ratings; the revised assumption leads to one notch of uplift , from two notches. Moody's continues to assume a low probability of government support for HPIB's deposit ratings resulting in no systemic support uplift.

RATIONALE FOR THE OUTLOOK

AIB

The stable outlook reflects Moody's expectation that the favourable operating environment will allow AIB to continue strengthening its credit fundamentals, but also that a material reduction in the stock of problem loans will remain the key challenge during in the outlook period.

BoI

The stable outlook on all BoI's ratings reflects improvements in capital and profitability, also stemming from the favourable operating environments in the UK and Ireland. Moody's also expects a reduction in the stock of problem loans from still high levels.

PTSB

On May 8, we concluded the review process on PTSB's ratings since the bank increased its capital by €400 million and issued €125 million of additional tier 1 securities. As a result, this rating action only includes the affirmation of the BCA driven by the change in the macro-profile described above. The stable outlook on PTSB's long-term deposit rating and senior unsecured rating incorporates Moody's expectation that potential losses on asset sales will likely entail some decline in PSTB's capital level. The outlook also incorporates improvements in profitability excluding the losses triggered from the above-mentioned asset sales, and ongoing asset-quality challenges.

HPIB

The ratings of HPIB are on review with direction uncertain. All The ratings of HPIB's parent Hewlett-Packard Company are on review for downgrade owing to the company's plan to separate its Personal Systems businesses (personal computer (PC) and printing) from its Enterprise businesses through a spin-off to shareholders. Although HPIB is committed to continue providing funding to customers of both resulting entities, the fundamental financial strength of the bank's ultimate parent is still uncertain. In parallel, Moody's is also HPIB's potential to remain viable in the event of the default of HP on its senior unsecured debt, and hence retain a BCA above the senior unsecured rating of its parent company.

RATIONALE FOR THE OUTLOOK ON JUNIOR INSTRUMENTS

Moody's has withdrawn the outlooks on subordinated, junior subordinated and preference stock ratings of BoI and on subordinated and junior subordinated of AIB for its own business reasons. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its Web site, www.moodys.com. Outlooks are now only assigned to long-term senior debt and deposit ratings, indicating the direction of any rating pressures.

RATIONALE FOR THE CR ASSESSMENT

As part of today's actions, Moody's has assigned CR Assessments to AIB, BoI, HPIB and KBCI. The CR Assessment, which is not a rating, reflects an issuer's probability of defaulting on certain bank operating liabilities, such as covered bonds, derivatives, letters of credit and other contractual commitments. In assigning the CR Assessment, Moody's evaluates the issuer's standalone strength and the likelihood, should the need arise, of affiliate and government support, as well as the anticipated seniority of counterparty obligations under Moody's LGF framework. The CR Assessment also assumes that authorities will likely take steps to preserve the continuity of a bank's key operations, maintain payment flows, and avoid contagion if the bank enter a resolution.

In most cases, the starting point for the CR Assessment is one notch above the bank's Adjusted BCA, to which Moody's then typically adds the same notches of government support uplift as applied to deposit and senior unsecured debt ratings. As a result, the CR Assessment for Irish banks, except for KBCI, is one notch higher than their senior unsecured debt and deposit ratings, reflecting Moody's view that authorities are likely to honor the operating obligations the CR Assessment refers to in order to preserve a bank's critical functions and reduce potential for contagion.

WHAT COULD CHANGE THE RATINGS UP/DOWN

The banks' BCAs could be upgraded due to (1) a significant reduction in the level of non-performing loans, (2) further improvements in profitability, excluding provision write backs, and (3) improvements in capital and funding levels.

The banks' BCAs could be downgraded due to (1) an increase in problem loans, (2) a failure to improve profitability and/or (3) a deterioration in liquidity and funding.

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carlos Suarez Duarte
Vice President - Senior Analyst
Financial Institutions Group
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

Nicholas Hill
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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 takes rating action on Irish Banks
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