DBRS Morningstar Confirms PTSB at BBB (low)/R-2 (middle), Trend Revised To Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long-Term Issuer Rating of Permanent tsb p.l.c (the Bank or PTSB) at BBB (low) and the Long-Term Issuer Rating of Permanent TSB Group Holdings p.l.c (PTSBG or the Group), the top-level holding company, at BB (high). Concurrently, the Bank’s Short-Term Issuer Rating was confirmed at R-2 (middle), and PTSBG’s Short-Term Issuer Rating was confirmed at R-3. The trends on all ratings have been revised to Negative from Stable. The Bank’s Intrinsic Assessment (IA) was maintained at BBB (low) and the Support Assessment remains at SA1. The Group’s Support Assessment is SA3. See the full list of ratings in the table at the end of this press release.

KEY RATING CONSIDERATIONS

The change of the Trend to Negative on the BBB (low) Long-Term Issuer Rating reflects our view that the Coronavirus Disease (COVID-19) pandemic is making the operating environment more challenging for banks in Ireland, including PTSBG. This is likely to translate into lower new lending volumes and lower revenues, negatively impacting the Bank’s capacity for credit loss absorption. PTSB’s exposure to potentially vulnerable sectors affected by COVID-19 relates largely to consumers’ ability to meet their mortgage payments and the housing market, with the majority of its loan book comprised of residential mortgages. As a result, we expect the impact of COVID-19 on asset quality deterioration to emerge towards the end of 2020 and through 2021 at the point when unemployment remains high but debt moratoria and government support for individuals comes to an end. Downward rating pressure would intensify should the crisis be prolonged.

The confirmation of PTSBG’s Long-Term Issuer rating at BBB (low) recognises the bank’s progress in reducing non-performing exposures in the run up to the COVID-19 pandemic. The ratings also reflect the ample cushion that PTSBG has over regulatory requirements, allowing for the impact of asset quality deterioration and higher loan loss provisions to be mitigated.

RATING DRIVERS

Given the COVID-19 environment, an upgrade of the ratings is unlikely. The Trend would return to Stable if the COVID-19 crisis does not translate into material asset quality deterioration and the impact is manageable from a profitability and capital perspective.

A downgrade of the Bank’s Long-Term Issuer Rating could result from a material impact on asset quality, capital and/or negative profitability as a result of the COVID-19 pandemic.

RATING RATIONALE

The majority of PTSBG’s sector exposure in their loan book relates to residential loans (97%), with around 22% of the total loan book comprising buy-to-let loans. PTSBG’s profitability was already under pressure from declining net interest income and we view the pressure as intensifying in the more challenging economic environment in Ireland. In FY 2019, net interest income declined 6% Year-over-Year (YoY), with pre-provision income declining 24% YoY. The bank announced in its Q1 trading update that new lending volumes in 2020 could be between 40%-50% lower than in 2019. The Bank also reported that it expects the cost of risk for 2020 to be around 60 bps, which we consider could be higher depending on the impact of asset quality deterioration emerging in coming quarters.

PTSBG starts this crisis from an improved balance sheet perspective with significantly lower non-performing loans (NPLs). The NPL ratio was 6.4% at end-2019, down from 25.6% at end-2016. This improvement was a key consideration supporting the BBB (low) rating. However, DBRS Morningstar notes that the reduction of NPLs largely incorporated significant sales and a securitisation of NPLs to investors, which we consider will be difficult to continue in this environment. As a result, PTSBG’s ability to sustain its good track record of NPL reduction will prove more challenging if asset quality deteriorates as a result of the COVID-19 impact. Moreover, DBRS Morningstar notes that PTSBG has a large proportion of stage 2 loans representing around 26% of total gross at end-2019, which could potentially become NPLs under the COVID-19 backdrop.

DBRS Morningstar views PTSBG’s capital position as robust even though internal capital generation is very modest. At end-March 2020, PTSBG reported a transitional CET1 ratio of 17.7% and a fully loaded CET1 ratio of 15.2%, significantly above the new 2020 minimum requirement of 8.9% (after the removal of the countercyclical buffers for exposures). This, in our view, provides a cushion to absorb credit losses and supports the confirmation of the ratings. PTSBG had a Liquidity Coverage Ratio of 188% at end-Q1.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

The Grid Summary Grades for PTSB are as follows: Franchise Strength – Good/Moderate; Earnings –Weak; Risk Profile –Moderate; Funding/Liquidity – Good/Moderate; Capitalisation – Moderate.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019). https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

The sources of information used for this rating include PTSB’s 2019 Annual Report, PTSB’s 2019 Annual Results Presentation, 2019 European Banking Authority Transparency Exercise and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/361279

Ratings assigned by DBRS Ratings GmbH, are subject to EU and U.S. regulations only

Lead Analyst: Pablo Manzano, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: October 27, 2009
Last Rating Date: October 23, 2019

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