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Rating Action:

Moody's upgrades long term deposit ratings of Bank of Ireland UK to Baa3

08 Feb 2017

The long-term ratings are placed on positive outlook

London, 08 February 2017 -- Moody's Investors Service (Moody's) has today upgraded the long-term deposit ratings of Bank of Ireland (UK) Plc (BOI UK) to Baa3 from Ba1. Moody's also upgraded the bank's baseline credit assessment (BCA) and adjusted BCA to baa3 from ba1 and its long-term counterparty risk assessment (CR Assessment) to A3(cr) from Baa1(cr). The short-term CR Assessment was confirmed at Prime-2(cr). The outlook on the bank's long-term deposit ratings is positive. The bank's short-term deposit ratings were upgraded to Prime-3 from Not Prime.

The upgrade of BOI UK's ratings reflects 1) the progress it has made towards reducing financial and operational linkages with Bank of Ireland (BOI) and therefore reducing its likelihood of failure; and 2) relatively strong financials compared with those of its parent, Bank of Ireland (BOI, LT deposit ratings Baa1/LT issuer ratings Baa2 with positive outlook, BCA ba1).

Today's rating action concludes a review process initiated in October 2016.

RATINGS RATIONALE

RATIONALE FOR THE UPGRADE OF THE BCA

The upgrade of BOI UK's BCA and adjusted BCA to baa3, one notch above the BCA of BOI, reflects the assessment of reduced financial and operational linkages with the bank's Irish parent and improved financials.

In Moody's view, BOI UK's financial and operational independence from BOI has increased, and the standalone creditworthiness of BOI is less of a constraint upon that of BOI UK. Since 2014, BOI UK generates all of its own business in the UK, using its excess liquidity to fund its own growth. Prior to this, BOI UK entered into a number of asset transfers and related capital transactions with its parent. In addition, exposure to BOI via interest rate hedging transactions has materially reduced with hedging now being structured through derivative transactions. Moody's further expects that capital transfers between the entities will now be limited to dividend payments, which would require board approval subject to compliance with regulatory capital requirements.

BOI UK is largely funded by customer deposits as well as making some use of the Bank of England's term funding facilities, and its use of funding from BOI is immaterial. Beyond this, the bank has also developed and implemented its own transfer pricing mechanism, having previously relied on BOI's methodology.

Nevertheless, Moody's believes that some significant connections between BOI UK and its parent remain, in particular (1) its reliance on BOI for the provision of some crucial operational and IT services through Service Level Agreements; (2) their continued close strategy and business planning interlinkages together with shared risk governance within the group's risk appetite framework; and (3) brand association and reputational risk-sharing.

In addition to greater operational independence from BOI, the rating upgrade was supported by the improving trends in the standalone financial fundamentals of BOI UK, namely: (1) its improving asset risk metrics, despite the downside risk arising from the bank's relatively high average loan-to-value (LTV) ratio compared to other UK lenders and its legacy commercial loan book; (2) its solid capital position; (3) its improved profitability, although business volumes and interest margins could be challenged by an uncertain operating environment in the wake of the UK's decision to leave the EU; and (4) a stable funding profile and a broad deposit base, reinforced by the bank's strategic partnerships with the Post Office and the Automobile Association (AA).

The assessment of these factors led Moody's to position BOI UK's BCA at baa3, one notch above the BCA of BOI thus introducing a differential between the standalone ratings of the parent and subsidiary. This positioning of the BCA acknowledges the stronger financial profile of the UK subsidiary compared with its parent as expressed in BOI UK's scorecard range at baa2-a3 based on the latest financials. Nevertheless, the remaining linkages with the parent, as noted above, limit this differential to one notch.

DEPOSIT RATINGS

The Baa3 long-term deposit ratings incorporate the results of Moody's Advanced Loss Given Failure (LGF) analysis, which indicates that BOI UK's deposits are likely to face a moderate loss-given-failure. A low level of subordinated debt in the liability structure, that would otherwise provide a loss absorbing cushion for deposits, and a relatively modest layer of junior deposits in the liability structure, given the bank's largely retail depositor base, result in no uplift from the BCA level for deposit ratings.

RATIONALE FOR THE POSITIVE OUTLOOK

The outlook on BOI UK's long-term deposit rating is positive, in line with the outlook on BOI's ratings. BOI UK's own metrics may come under some pressure given an expected slowdown in the UK resulting from the process of leaving the EU. However a more positive dynamic in Ireland will likely benefit its parent BOI's creditworthiness, which would therefore be a lesser constraint on that of BOI UK's BCA. As such an upgrade in BOI's BCA would likely lead to an upgrade in BOI UK's BCA and its deposit rating.

Counterparty Risk (CR) Assessment

The CR Assessment was upgraded and positioned at A3(cr)/ Prime 2(cr), three notches above the BOI UK's BCA of baa3, based on the cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments.

WHAT COULD MOVE THE RATING UP / DOWN

BOI UK's deposit ratings could be upgraded following (1) an upgrade in the BCA of its parent BOI, which would likely lead to an upgrade in BOI UK's own BCA; or (2) a material increase in the bank's bail-in-able debt.

Given the positive outlook, a downgrade of the ratings is currently unlikely. But BOI UK's deposit ratings could be downgraded as a result of a downgrade of its baa3 BCA driven by asset quality deterioration, unexpected losses that lead BOI UK's capitalisation to decline significantly, or a material reduction in its profitability.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Irakli Pipia
VP - Senior Credit Officer
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
MD - Banking
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

No Related Data.
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