S&P Cuts Allied Irish From A- To BBB+
- We consider that Allied Irish Bank PLC's (AIB) reputation has deteriorated further as a result of the higher level of capital that it is required to raise by its regulator and due to government-imposed management changes. In our opinion, the ability of AIB to return to an 'a' category stand-alone credit profile is unlikely for a number of years.
- As a result, we are lowering our ratings on AIB to 'BBB+' from 'A-'. At the same time, we are lowering AIB's Lower Tier 2 debt ratings to 'BB' from 'BBB+', reflecting our view that the Irish authorities are now demonstrating a strong willingness to direct a restructuring for certain other Irish banks that could be detrimental to all Irish banks' Lower Tier 2 debt.
- The negative outlook reflects our opinion of the downside risk to the recovery in AIB's earnings, our expectation that AIB's significant reliance on funding and liquidity support from central bank authorities will persist for the foreseeable future, and a degree of uncertainty that persists over AIB's business disposal program.
On Oct. 8, 2010, Standard & Poor's Ratings Services lowered its long-term counterparty credit rating on Allied Irish Banks PLC (AIB) to 'BBB+' from 'A-'. At the same time, we affirmed the 'A-2' short-term counterparty credit rating on AIB. The outlook is negative. Issuance guaranteed by the Republic of Ireland (AA-/Negative/A-1+) is not affected by today's rating action. We also lowered AIB's Lower Tier 2 debt ratings to 'BB' from 'BBB+' and the counterparty credit ratings on AIB's wholly owned U.K. subsidiary, AIB Group (UK) PLC ((AIB UK), to 'BBB' from 'A-'. In addition, the 'A-2' short-term ratings on AIB UK were affirmed. The outlook on AIB UK is developing.
The rating action reflects our view that AIB's reputation has deteriorated further as a result of the higher level of capital that it is required to raise by its regulator and due to government-imposed management changes. In our opinion, the ability of AIB to return to an 'a' category stand-alone credit profile (SACP) is unlikely for a number of years.
The Irish Financial Regulator has announced that AIB must now raise €10.4 billion of equity capital, a significant €3.0 billion rise on the Prudential Capital Assessment Review that it published in March. The increase follows a regulatory review of AIB's potential losses on loans that will be transferred by year-end to Ireland's National Asset Management Agency (NAMA). Participating Irish banks are transferring property development lending and associated assets to NAMA at a significant discount to help cleanse their balance sheet.
As a result, AIB has announced that it will launch during November a €5.4 billion equity capital raise underwritten by the Irish government. The balance of the capital raise (of which €2.5 billion will reportedly be raised from the forthcoming sale of its Polish interests, while AIB has stated that the proposed disposal of its 22.4% stake in U.S. regional bank, M&T Bank Corp., will generate about €0.9 billion) is intended to be achieved through disposals and other capital generating measures. The government reports that in the event that AIB's residual capital requirement is not met through asset sales by March 31, 2011, it will meet any shortfall.
In our view, it seems probable that AIB will likely become majority owned by the state. AIB reports that it will retain its existing stock exchange listings, even if the remaining free float is minor.
Further, the Minister of Finance has requested that AIB's Executive Chairman and Group Managing Director depart AIB, as part of progressive management and board changes.
Reflective of our view of AIB's high systemic importance and the consequent strong support that we expect AIB to continue to receive from the Irish government, we factor four notches of support in our 'BBB+' rating on AIB above its 'bb' SACP. We note that AIB is benefiting from significant funding and liquidity support from central bank authorities.
AIB has a reported €4.1 billion of Lower Tier 2 debt outstanding at June 30, 2010. The Minister of Finance has stated that the government is working to enable the implementation of reorganization measures specific to two more highly distressed Irish financial institutions that would lead to their Lower Tier 2 debtholders sharing the burden of their rescue. In accordance with our criteria ("Methodology For Rating Bank Nondeferrable Subordinated Debt (Lower Tier 2 Regulatory Capital)," published Aug. 4, 2009 on RatingsDirect) where we consider that the authorities are demonstrating a strong willingness to direct a restructuring that could be detrimental to Lower Tier 2 debt, we widen the differential between the long-term counterparty credit rating and Lower Tier 2 issue ratings. We further widen the notching if the counterparty credit rating is lifted above the bank's SACP, as is the case for AIB. Thus, AIB's Lower Tier 2 ratings are now four notches below its counterparty credit rating and, absent any other development which we believe may change the risk of deferral, are likely to move in line accordingly.
The rating action on AIB UK to cap its ratings at one notch below that of its parent is consistent with our rating approach to banking group subsidiaries which we consider are "strategically important". Given the Irish government's increased involvement in AIB and our perception that the sale process is becoming extended in duration, we have reappraised our view of the strategic importance of AIB UK to its parent. The developing outlook on AIB UK reflects our view of the ongoing uncertainty about the future ownership of this business.
The negative outlook on AIB reflects our opinion of the downside risk to the recovery in its earnings, our expectation that its significant reliance on funding and liquidity support from central bank authorities will persist for the foreseeable future, and a degree of uncertainty that persists over AIB's business disposal program. Moreover, the ratings currently benefit from more notches of support than many government-supported European banks. As a result, we need to gain confidence that AIB's SACP could make progress in moving toward the long-term counterparty credit rating within a reasonable timeframe.
The ratings could be lowered if we expect earnings to remain weak, either as a result of a still-depressed net interest margin or elevated loss charges on remaining non-NAMA loans, if AIB's funding profile fails to improve, or if we observe difficulties in AIB's restructuring process.
The outlook could be revised to stable if AIB successfully completes its capital raising, if we observe clarity on the strategic direction of AIB, and if we have confidence in the recovery of its financial profile.