DBRS Morningstar Confirms Bank of Ireland’s LT Issuer Rating at A (low), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of The Governor and Company of the Bank of Ireland (Bank of Ireland, BoI or the Bank), including the Long-Term Issuer Rating at A (low) and the Short-Term Issuer Rating at R-1 (low). The trend on the Bank’s ratings remains Stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) is A (low). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the Long-Term Issuer Rating reflects BOI’s franchise strength as one of the leading financial institutions in the Republic of Ireland with business diversification in the United Kingdom (UK). The ratings also consider the Bank’s track record in continuing reducing its stock of non-performing loans (NPLs) as well as BOI’s sound capital position and robust funding and liquidity profile. DBRS Morningstar considers that BOI’s profitability is still below its potential due to constrained revenue generation and high non-core costs, although it is very well positioned to improve as a result of higher interest rates, higher banking activity and a less competitive Irish banking environment.

The acquisition of some portfolios from KBC Bank Ireland (KBC) is expected to have manageable integration risks and capital impact and in DBRS Morningstar’s view should further strengthen BOI’s domestic franchise to face the uncertain operating environment of high inflationary pressures and global economic slowdown.

RATING DRIVERS

An upgrade of the Long-Term ratings would require longer track record of sustained improvement in profitability as well as further reduction of NPLs, while maintaining the current capital position .

The Long-Term ratings would be downgraded if there was a material deterioration in the Bank's asset quality and/or profitability materially impacting its capital position.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong / Good
Bank of Ireland, a subsidiary of Bank of Ireland Group plc (the Group), is the largest bank by assets in the Republic of Ireland (ROI) with a strong and diverse domestic franchise, with leading market shares in mortgages and corporates and SMEs and it is also the leading bancassurer offering wealth and life insurance products. The Group also has a small but solid franchise in the UK, particularly in consumer and corporate lending. In order to increase its portfolio diversification, BOI completed the acquisition of J&E Davy (Davy), the Irish market leader in wealth management and capital market services in June 2022, doubling its Assets Under Management to EUR 39 billion. In 1H 2022, BOI received the Competition and Consumer Protection Commission (CCPC) approval to acquire a portfolio of EUR 8.9 billion of customer loans and EUR 4.4 billion of customer deposits from KBC, representing 10.5% of total pro-forma gross loans and 4.5% of total pro-forma customer deposits. The transaction is expected to close in 1Q 2023.

Earnings Combined Building Block (BB) Assessment: Moderate
BOI's profitability is still affected by a high cost base and non-core costs, as well as weaker revenue generation but DBRS Morningstar notes that the Bank is very well positioned to reinforce its profitability from rising interest rates, higher banking activity and a less competitive Irish banking environment. In 1H 2022, the Group reported a net profit of EUR 279 million, down 18.2% YoY, mostly driven by higher operating costs and lower revenues in the Wealth and Insurance segment (down 83% YoY) affected by the market volatility. Operating expenses were up 1.2% YoY driven by non-core charges of EUR 84 million related to Tracker Mortgage Examination, acquisitions and transformation programme costs. Excluding all those, underlying operating expenses were down 1% YoY. The cost to income ratio excluding inorganic transactions stood at 66.5%. LLPs amounted to EUR 47 million compared to EUR 1 million in 1H 2021 due to higher provisions in the Retail UK and Corporate and Markets divisions.

Risk Combined Building Block (BB) Assessment: Good / Moderate
Following the peak of NPLs experienced in 2020 as a consequence of the COVID-19 pandemic and the implementation of the updated definition of default, BOI’s asset quality metrics continued to gradually improve with reductions in NPLs and Stage 2 loans. At end-September 2022 BOI reported an NPL ratio of 5.4%, down from 5.50% at end-2021 and 5.74% at end-2020. In November 2022, the Bank announced two NPL portfolio disposals that will bring down the September-2022 NPL ratio to 3.7% upon completion. Additionally, the completion of the acquisition of the KBC portfolios is expected to reduce the NPL ratio by a further 0.4%. Stage 2 loans, although still 2x pre-pandemic levels, decreased by 17.4% at end-June 2022 versus end-2021 as the Irish economy surged spurred by the removal of all COVID-19 related restrictions.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
DBRS Morningstar considers BOI’s funding profile as robust largely supported by a large, stable and growing customer deposit base. Customer deposits increased to EUR 94.1 billion at end-June 2022 (excluding fair value hedge adjustments), up 1.4% compared to end-2021, largely reflecting new customer deposits from the KBC group and NatWest Group following the announcement of their exit from the Irish banking market. BOI’s loan-to-deposit ratio was sound at c. 81% at end-June 2022. BOI fully repaid its T-LTRO drawings in November 2022 following the ECB announcement on price condition changes for the T-LTRO III as a result of the current rising interest rate environment. BOI’s liquidity is strong and the Bank reported a Liquidity Coverage Ratio of 218% and a Net Stable Funding Ratio of 149% at end-June 2022.

Capitalisation Combined Building Block (BB) Assessment: Good / Moderate
BOI’s capital position is sound and the Bank maintains large cushions against minimum requirements. On a fully-loaded basis, the Group reported a CET1 ratio of 15.7% at end-Q3 2022 compared to 16.0% at end-2021. The decline was mostly driven by the impact of the Davy acquisition (-80 basis points (bps)). In 2023, the minimum CET1 ratio requirement (on a transitional basis) is 10.67% which compares to a phased-in CET1 ratio of 16.2% at end-Q3 2022, translating into a capital cushion of 553bps. DBRS Morningstar expects BOI’s capital position to remain solid after the completion of the KBC transaction (-120 bps) and the implementation of IFRS 17 from January 2023 (-30bps). The Group’s leverage ratio (on a fully-loaded basis) was 6.1% at end-June 2022 versus a binding leverage requirement of 3% from end-June 2021.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/408498

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022)

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) https://www.dbrsmorningstar.com/research/398692 In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, BOI’s Annual Report 2020 and 2021, BOI’s Interim Reports H1 2021 and H1 2022, BOI’s Presentations 2021 and H1 2022, BOI’s Q3 2022 Trading Update. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/408500

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: María Jesús Parra Chiclano, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Head of Global FIG
Initial Rating Date: September 6, 2005
Last Rating Date: January 20, 2022

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