Upgrades driven by improved standalone creditworthiness and increasing loss-absorbing debt
London, 25 July 2018 -- Moody's Investors Service (Moody's) today upgraded the long-term
senior unsecured debt and deposit ratings of Allied Irish Banks,
p.l.c. (AIB) to A3 and A2, from Baa2 and Baa1,
respectively. The rating agency also upgraded the long-term
senior unsecured debt rating of the bank's holding company, AIB
Group plc (AIB Group), to Baa3 from Ba2. As part of the same
action, Moody's upgraded the baseline credit assessment (BCA)
and adjusted BCA of AIB to baa3 from ba1. The agency assigned a
positive outlook to the A3 long-term senior unsecured debt rating
of AIB and to the Baa3 long-term senior unsecured debt rating of
AIB Group, while assigning a stable outlook to the A2 long-term
deposit rating of AIB. Moody's also upgraded AIB's long-term
Counterparty Risk Ratings (CRR) and Counterparty Risk Assessments (CRA)
to A2 and A2(cr) from A3 and A3(cr), respectively.
The upgrades of the senior unsecured and deposit ratings reflect both
(i) the improvement in AIB's asset quality, reflected in the upgrade
of the BCA to baa3; and (ii) Moody's expectation of a reduction
in loss-given-failure for deposits and senior bank and holding
company debt given the additional protection provided by debt securities
to be issued by AIB Group.
A full list of affected ratings can be found at the end of this press
release.
RATINGS RATIONALE
BCA
The upgrade of AIB's BCA to baa3 from ba1 is underpinned by the faster-than-expected
improvement in asset quality achieved in 2017 and H1 2018. In May
2018, AIB announced it had agreed to sell a portfolio of nonperforming
loans to Irish credit management company Everyday Finance DAC as part
of a consortium arrangement with Everyday and affiliates of US distressed
debt fund Cerberus Capital Management. The sale lowered AIB's
nonperforming exposure (NPE) ratio to circa 12% at end-June
2018 (Moody's estimates), from 14% as of 31 March 2018,
and marked an important step in its de-risking strategy,
which targets an NPE ratio of 5% by the end of 2019. AIB
indicated that it would receive an €800 million cash consideration
for the loans, and that the sale would be capital accretive.
The €1.1 billion portfolio AIB is selling to Everyday consists
mainly of commercial property and investments, and excludes private
homes and family farms. Moody's expects that AIB will not
include home loans in asset sales, and that it will favour pursuing
case-by-case restructurings where possible, which
has constituted 95% of its non-performing loan reductions
so far. Given this, and as for other domestic banks,
Moody's expects that AIB's legacy portfolio of residential mortgages
will require a long time to wind down, given banks' current
low level of repossessions.
The baa3 BCA also reflects the bank's good level of capitalization,
its stable profitability, as well as sound funding and liquidity
profile. It is constrained by the likely increase in market funding
reliance as MREL rules come into force, as well as by the remaining
large stock of non-performing loans and loans subject to forbearance
arrangements.
LONG-TERM RATINGS
The Advanced Loss Given Failure (LGF) notching assigned to AIB's long-term
deposit and senior unsecured debt ratings reflect AIB's expected issuance
plans given its final MREL target of 28.04% of RWAs,
confirmed in May 2018, which will provide additional protection
for the bank's senior unsecured debt and deposits, and for the holding
company's senior unsecured debt over the outlook horizon.
The upgrade of AIB's long-term senior unsecured debt and deposit
ratings to A3 and A2, respectively, include the uplift resulting
from Moody's Advanced LGF analysis. The senior unsecured debt and
deposit ratings now benefit from two and three notches of uplift respectively,
given their different weights in the bank's liability structure.
In addition, both ratings incorporate one notch of government support,
which remains unchanged, reflecting a moderate probability of government
support for AIB's senior unsecured creditors and wholesale deposits,
should the bank fail.
The Baa3 rating assigned to the senior unsecured rating of AIB Group reflects
the rating agency's expectation that the debt class is likely to face
moderate loss-given-failure due to the increasing loss absorption
provided by its own volume and the amount of debt subordinated to it.
For holding company instruments, which are meant to absorb losses
in resolution, Moody's believes that the potential for government
support is therefore low and hence these ratings do not include any related
uplift.
OUTLOOK
The positive outlook assigned to the A3 long-term senior unsecured
debt rating of AIB and to the Baa3 long-term senior unsecured rating
of AIB Group reflects Moody's view that both ratings would move
in line with a potential further upgrade of the BCA. Such a BCA
upgrade could be warranted over the outlook horizon, should the
bank succeed in reducing its non-performing loans at the expected
rate of decline, while maintaining its strong profitability,
capital and liquidity metrics.
Over the outlook period, the rating agency will monitor (i) AIB's
ability to further reduce the non-performing loan portfolio in
line with the expected rate of decline, (ii) whether the bank's
restructuring measures and potential further asset sales are detrimental
to its capital generation capacity, and (iii) whether the bank will
be able to maintain its strong underlying profitability in the context
of increased competition on mortgage lending.
The stable outlook assigned to the A2 long-term deposit rating
of AIB reflects Moody's view that a potential further one-notch
upgrade of the BCA would not lead to an upgrade of the rating.
This is because the capacity of Ireland to provide support, represented
by its A2 sovereign rating, would not warrant a one-notch
uplift for government support if the preliminary rating assessment (PRA)
were upgraded to a2.
Counterparty Risk Rating (CRR) and CR Assessment (CRA)
The bank's long-term CRR and CRA of A2 and A2(cr), respectively,
benefit from three notches of uplift under the LGF analysis, given
significant volume of subordinated debt, senior debt and wholesale
deposits. Both the CRR and the CRA benefit from one notch of government
support, which remains unchanged, reflecting a moderate probability
of government support.
WHAT COULD MOVE THE RATINGS UP/DOWN
AIB's deposit ratings could be upgraded as a result of an upgrade in its
standalone BCA by more than one notch.
AIB's long-term debt ratings could be upgraded as a result of (i)
an upgrade in its standalone BCA; or (ii) a significant increase
in the bank's bail-in-able debt.
The bank's BCA could be upgraded because of (i) a further reduction in
non-performing loans; (ii) an improvement in stressed-capital
resilience above Moody's expectations; or (3) sustained core profitability.
AIB's ratings could be downgraded as a result of (i) a downgrade in its
standalone BCA; or (ii) redemption of maturing subordinated instruments
without their replacement.
AIB's BCA could be downgraded because of (i) a significant deterioration
in the bank's asset risk metrics; (ii) a weakening of its solvency
profile; or (iii) a worsening of its core profitability ratios.
LIST OF AFFECTED RATINGS
Issuer: AIB Group plc
..Upgrades:
....Senior Unsecured Medium-Term Note
Program, Upgraded to (P)Baa3 from (P)Ba2
....Senior Unsecured Regular Bond/Debenture,
Upgraded to Baa3 Positive from Ba2 Positive
..Outlook Actions:
....Outlook, Remains Positive
Issuer: Allied Irish Banks, p.l.c.
..Upgrades:
.... Adjusted Baseline Credit Assessment,
Upgraded to baa3 from ba1
.... Baseline Credit Assessment, Upgraded
to baa3 from ba1
.... Long-term Counterparty Risk Assessment,
Upgraded to A2(cr) from A3(cr)
.... Short-term Counterparty Risk Assessment,
Upgraded to P-1(cr) from P-2(cr)
.... Long-term Counterparty Risk Rating,
Upgraded to A2 from A3
.... Short-term Counterparty Risk Rating,
Upgraded to P-1 from P-2
.... Long-term Bank Deposit Ratings,
Upgraded to A2 Stable from Baa1 Positive
.... Short-term Bank Deposit Ratings,
Upgraded to P-1 from P-2
.... Senior Unsecured Medium-Term Note
Program, Upgraded to (P)A3 from (P)Baa2
.... Subordinate Medium-Term Note Program,
Upgraded to (P)Ba1 from (P)Ba2
.... Junior Subordinate Medium-Term
Note Program, Upgraded to (P)Ba2 from (P)Ba3
.... Senior Unsecured Regular Bond/Debenture,
Upgraded to A3 Positive from Baa2 Positive
.... Pref. Stock Non-cumulative,
Upgraded to Ba3(hyb) from B1(hyb)
.... Subordinate Regular Bond/Debenture,
Upgraded to Ba1 from Ba2
..Affirmations:
........Other
Short Term, affirmed (P)P-2
..Outlook Actions:
....Outlook, Changed To Positive(m)
From Positive
Issuer: EBS d.a.c.
..Upgrades:
.... Adjusted Baseline Credit Assessment ,
Upgraded to baa3 from ba1
.... Baseline Credit Assessment , Upgraded
to baa3 from ba1
.... Long-term Counterparty Risk Assessment
, Upgraded to A2(cr) from A3(cr)
.... Short-term Counterparty Risk Assessment
, Upgraded to P-1(cr) from P-2(cr)
.... Long-term Counterparty Risk Ratings,
Upgraded to A2 from A3
.... Short-term Counterparty Risk Ratings,
Upgraded to P-1 from P-2
.... Long-term Bank Deposit Ratings,
Upgraded to A2 Stable from Baa1 Positive
.... Short-term Bank Deposit Ratings,
Upgraded to P-1 from P-2
..Outlook Actions:
....Outlook, Changed To Stable From
Positive
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
July 2018. 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.
Roland Auquier
Asst Vice President - Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
