Standalone BCA upgraded to b1 from b3 for Ulster Bank Limited and to b2 from b3 for Ulster Bank Ireland Limited
London, 03 June 2015 -- Moody's Investor Service has today upgraded Ulster Bank Limited's
(UBL) long-term deposit and issuer ratings to A3 and assigned a
stable outlook. Moody also upgraded the bank's standalone
baseline credit assessment (BCA) to b1 from b3 and downgraded its adjusted
BCA to ba1 from baa3. Moreover, the agency assigned Counterparty
Risk Assessment (CR Assessment) of A3(cr)/Prime-2(cr) to UBL.
Additionally, Moody's confirmed Ulster Bank Ireland Limited's
(UBIL) - UBL's Irish subsidiary - Baa3 long-term
deposit rating and downgraded the bank's senior unsecured MTN rating
to (P)Ba1 from (P)Baa3, and assigned a stable outlook. The
agency also upgraded the bank's BCA to b2 from b3 and downgraded
its adjusted BCA to ba1 from baa3. Finally, Moody's
assigned a CR Assessment of Baa1(cr)/Prime-2(cr) to UBIL.
This rating action reflects the implementation of Moody's new bank
rating methodology, specifically the advance Loss Given Failure
(LGF) analysis, and revision of affiliate and government support
assumptions.
This rating action concludes the review initiated on 17 March 2015 for
UBL and on 19 March 2015 for UBIL.
RATINGS RATIONALE
---RATIONALE FOR THE BCA
Moody's says that the upgrades of UBL and UBIL's BCAs were
driven by the material improvements in their solvency, profitability
and funding. Although the banks' asset quality metrics remain
weak, and worse than those of some domestic peers, they are
improving and the agency anticipates further improvements over the outlook
period.
Owing to the large capital injections made by the parent bank, Royal
Bank of Scotland plc (RBS - A3/A3 Stable, ba1) and return
to profitability in 2014, UBL and UBIL now benefit from strong regulatory
capital ratios, with Common Equity Tier 1 ratios of 15.7%
and 17.3%, respectively, at end-2014,
which are among the highest in their peer group.
After seven years of operating losses, both banks returned to profitability
in 2014, which was bolstered by write-backs on their problem
loan portfolios. Owing to that, both UBL and UBIL recorded
net income of GBP1.9bn and EUR1.9bn respectively,
versus losses of GBP4.1bn and EUR4.3bn, respectively,
in 2013. The rating agency notes that both banks have materially
restructured their operations and are in the process of restoring their
business model. As such, Moody's expects pre-provision
profitability to gradually improve, although it does not anticipate
the banks to benefit from further large write-backs during the
outlook period.
UBL and UBIL have also materially improved their funding and liquidity
positions in the last year, owing to the significant loan deleveraging
and increased focus on improving the quality of deposits. These
elements have substantially reduced the banks' funding gap (with
gross loan-to-deposit ratios declining to 170% (2013:
193%) for UBL and 193% (2013: 224%) for UBIL)
and reliance on parent funding. In contrast to its Irish subsidiary,
Moody's notes that UBL does not manage its liquidity on a standalone
basis, as it is included in the RBS UK Defined Liquidity Group.
In the agency's view, this makes the funding and liquidity
profile of UBL stronger than that of UBIL and is the main driver of the
difference in the two banks' BCAs.
While the agency recognizes the improvement in UBL and UBIL's risk
profile, as their problem loans declined by 20.1%
and 14.8%, respectively, year-on-year,
their problem loan ratios remain high, at 42.9% and
43.5%, respectively, at end-2014.
Despite the expectation of further improvements in asset quality metrics,
which have continued in the first five months of 2015, through the
sale of some legacy assets portfolios, Moody's believes that
asset quality will remain weak over the outlook period and will continue
to weigh on the banks' credit profiles.
---RATIONALE FOR THE ADJUSTED BCA
The downgrade of both banks' adjusted BCAs to ba1 from baa3 was
driven by the change in the reference point used to calculate the amount
of parental support uplift.
Before today's rating actions, Moody's used RBS's
long-term deposit rating as the reference point to arrive to UBL
and UBIL's adjusted BCAs, implying that both banks might indirectly
benefit from the UK government support in case of need. Following
the introduction of the Bank Recovery and Resolution Directive (BRRD)
in the European Union, and in accordance with the agency's
new bank rating methodology, Moody's now uses the parent's
BCA of ba1 as the reference point and assigns government support in a
separate step.
However the agency expects that RBS will continue to maintain a high level
of commitment toward UBL and UBIL.
--- RATIONALE FOR THE DEPOSIT AND ISSUER RATINGS
Moody's says that the upgrade of UBL's deposit and issuer ratings,
the confirmation of UBIL's deposit rating and the downgrade of its
senior unsecured MTN rating result from the downgrade of the banks'
adjusted BCA, the introduction of the rating agency's LGF analysis,
and revised government support assumptions.
RBS, UBL and UBIL are subject to the BRRD, which Moody's
considers to be an Operational Resolution Regime. The rating agency's
standard assumptions, which are applied to the three banks,
assume residual tangible common equity of 3% 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.
As RBS and UBL are based in the UK, Moody's considers both
banks as being part of the same resolution perimeter. Consequently,
the LGF analysis of the two banks is based upon the UK balance sheet.
Under these assumptions, UBL's deposits and issuer ratings are likely
to face extremely low loss-given-failure, due to the
loss absorption provided by the large amount of subordinated debt and,
potentially, by senior unsecured debt should deposits be treated
preferentially in a resolution, as well as the substantial volume
of deposits themselves. This results in three notches of uplift
from the adjusted BCA for both deposits and senior debt ratings.
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 led to a lower expectation of government support.
The rating agency now expects a moderate probability of government support
for the deposits and senior debt of UBL, in line with that for RBS,
resulting in a further one-notch uplift to UBL's deposit
and debt ratings.
Being based in Ireland, UBIL is not part of the UK resolution perimeter.
Under the assumptions described above, UBIL's deposits are likely
to face low loss-given-failure, resulting in a rating
of a notch above the adjusted BCA. Conversely, UBIL's
senior debt holders are likely to face moderate loss-given-failure,
resulting in a rating at the same level of the adjusted BCA, due
to the more limited amount of subordinated instruments which would protect
senior unsecured debt and deposit in a resolution. Moody's
does not consider UBIL to be a systemically important bank. As
such, the rating agency expects a low probability of government
support for UBIL's deposits, resulting in no further uplift.
--- RATIONALE FOR THE STABLE OUTLOOK
The stable outlooks on all ratings incorporate Moody's expectation
that the favourable operating environment will allow UBL and UBIL to continue
strengthening their credit fundamentals. The successful disposal
of legacy exposures should further improve their asset quality and reduce
their wholesale funding needs. The stable outlooks are in line
with the outlook on the parent company, RBS.
--- RATIONALE FOR THE CR ASSESSMENT
As part of today's actions, Moody's has assigned a A3(cr)/Prime-2(cr)
CR Assessment to UBL and a Baa1(cr)/Prime-2(cr) CR Assessment to
UBIL, four and three notches respectively above their adjusted BCA.
UBL and UBIL's CR Assessments are driven by the banks' ba1 adjusted
BCA, by substantial bail-in-able debt and deposits
likely to support the operating obligations and by government support,
which is equivalent to that applied to deposits in each case.
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 advanced Loss Given Failure 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 should the bank enter a resolution.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's says that UBL and UBIL's deposit and debt ratings
could be upgraded if the banks continue to strengthen their credit fundamentals
and reduce the amount of legacy and nonperforming assets on their balance
sheets. A positive change in the banks' adjusted BCA would
likely affect all instrument ratings.
UBL and UBIL's ratings could be downgraded should they be loss-making
in 2015 or a deterioration in asset quality metrics. A downward
movement in UBIL's adjusted BCA would likely result in downgrades
to all instrument ratings.
LIST OF AFFECTED RATINGS
Downgrades:
..Issuer: Ulster Bank Ireland Limited
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Ba1 from (P)Baa3
....Adjusted Baseline Credit Assessment,
Downgraded to ba1 from baa3
..Issuer: Ulster Bank Limited
....Adjusted Baseline Credit Assessment,
Downgraded to ba1 from baa3
Upgrades:
..Issuer: Ulster Bank Ireland Limited
....Baseline Credit Assessment, Upgraded
to b2 from b3
..Issuer: Ulster Bank Limited
....Long-term Deposit Rating,
Upgraded to A3 stable from Baa3 Rating under Review
....Issuer Rating, Upgraded to A3 stable
from Baa3 Rating under Review
....Short-term Deposit Rating,
Upgraded to P-2 from P-3
....Baseline Credit Assessment, Upgraded
to b1 from b3
Confirmations:
..Issuer: Ulster Bank Ireland Limited
....Long-term Deposit Rating,
Confirmed at Baa3, outlook changed to stable from Rating under Review
....Short-term Deposit Rating,
Confirmed at P-3
....Senior Unsecured Deposit Program,
Confirmed at P-3
....Senior Unsecured Commercial Paper,
Confirmed at P-3
....Senior Unsecured Medium-Term Note
Program, Confirmed at (P)P-3
Assignments:
..Issuer: Ulster Bank Ireland Limited
.... Counterparty Risk Assessment, Assigned
P-2(cr)
.... Counterparty Risk Assessment, Assigned
Baa1(cr)
..Issuer: Ulster Bank Limited
.... Counterparty Risk Assessment, Assigned
A3(cr)
.... Counterparty Risk Assessment, Assigned
P-2(cr)
Outlook Actions:
..Issuer: Ulster Bank Ireland Limited
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Ulster Bank Limited
....Outlook, Changed To Stable From
Rating Under Review
PRINCIPAL METHODOLOGY
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.
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.
Dany Castiglione
Asst Vice President - 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 upgrades Ulster Bank Limited's deposit and issuer ratings to A3 and confirms Ulster Bank Ireland Limited's Baa3 deposit rating; outlook stable
