The Governor and Company of the Bank of Ireland

Transcription

1 Rating Report Previous Report: May 13, 2013 Analysts Ross Abercromby David Laterza Jack Deegan Ratings Issuer Debt Rated Rating Trend Issuer Rating BBB Negative Non-Guaranteed Long-Term Debt BBB Negative Non-Guaranteed Long-Term Deposits BBB Negative Non- Guaranteed Short-Term Debt Negative Non-Guaranteed Short-Term Deposits Negative Long-Term Debt Guaranteed by Irish A Stable Long-Term Deposits Guaranteed by Irish A Stable Media Contact: Stephen Bernard sbernard@dbrs.com The Bank Bank of Ireland is the largest financial services group in Ireland as measured by total assets. The Group offers a full array of banking and insurance services in Ireland and is focused on consumer banking in the United Kingdom. The Group holds major market positions across all major banking products in Ireland. Recent Actions 22 August 2014 DBRS Confirms Bank of Ireland at BBB, Trend Remains Negative For a complete list of ratings, see page 14. Rating Rationale DBRS Ratings Limited (DBRS) rates (BoI, the Bank or the Group), at BBB for Non-Guaranteed Long-Term Debt and Non-Guaranteed Long-Term Deposits. The trend on all non-guaranteed ratings is Negative. The Bank s intrinsic assessment (IA) is BBB. DBRS maintains a Support Assessment of SA-2 for BoI due to the Bank s systemic importance within Ireland, and the explicit support provided to the Bank. This reflects DBRS s expectation that some form of timely systemic support would be provided to the Bank, if needed, and leads to a two-notch uplift of the final rating from the IA. (Continued on page 2) Rating Considerations Strengths (1) Strong domestic franchise complemented by a growing consumer franchise in the UK (2) Capital position remains relatively strong and this should be boosted by the Bank s return to profitability Challenges (1) Continuing to improve profitability (2) Further improving credit metrics and minimising losses on its still troubled Irish portfolios (3) Maintaining the improvement in the funding profile. 1 August 2014 DBRS: Bank of Ireland Returns to Profitability in 1H14 3 April 2014 DBRS Confirms Irish Guaranteed LT Debt of the Bank of Ireland at A ; Trend Revised to Stable 4 March 2014 DBRS: Bank of Ireland Reports Fall in Defaulted Loans but Higher Impairments Lead to Net Loss Financial Information Bank of Ireland EUR million, unless otherwise stated 30/06/ /12/ /12/ /12/ /12/2010 Total Assets 130, , , , ,473 Equity 8,269 7,869 8,655 10,303 7,407 Pre-provision operating income (IBPT) 801 1, ,288 3,573 Net Income , Net Interest Income / Risk Weighted Assets (%) 4.26% 3.55% 2.56% 2.30% 2.81% Risk-Weighted Earning Capacity (%) 2.92% 2.20% 0.22% 3.13% 4.03% Post-provision Risk-Weighted Earning Capacity (% 1.55% -0.75% -2.64% 0.39% 1.45% Efficiency Ratio (%) 47.54% 51.25% 92.39% 42.00% 23.08% Impaired Loans % Gross Loans 17.00% 17.02% 16.27% 12.75% 9.19% Core Tier 1 (As-reported) 13.20% 12.20% 13.80% 14.30% 9.70% Source: SNL Financial, DBRS 1 Financial Institutions: Banks & Trusts

2 Rating Rationale (Continued from page 1) The Bank s ratings reflect the strong and resilient franchise that the Bank has in Ireland and Northern Ireland, as well as the consumer banking franchise in the UK, and the continuing progress that the Bank is making, most recently highlighted by the return to profitability in 1H14. DBRS also notes that the approval of the revised EU Restructuring Plan in 2013 included the Bank no longer being required to sell its life assurance subsidiary, meaning that the strong Irish franchise has been relatively unaffected. The Negative trend reflects the still very high level of impaired assets, and some uncertainty with regards to the outcome of the European Banking Authority (EBA) stress tests later in Depending on the stringency of these tests, this could potentially lead to a further capital requirement, although DBRS considers this is relatively unlikely and is of the opinion that even if it were the case the Bank would likely be able to raise equity from shareholders. BoI reported a net profit of EUR 344 million in 1H14, marking the first half year profit since 2008, excluding periods which incorporated substantial one-off profits from liability management exercises. The return to profitability was helped by a substantial improvement in 1H14 of the Bank s Net Interest Margin (excluding the cost of the Eligible Liabilities Guarantee Scheme (ELG)) to 2.05%, as well as the Bank s focus on controlling the cost base. In addition to the improved underlying performance, the Bank s results in 1H14 also benefited from a substantial reduction in the impairment charge. Despite the improvement in the impairment charge, it still remains elevated at 97 basis points (bps) of loans and advances. However due to the high level of impairments taken to date, and the ongoing recovery in the Irish domestic economy, DBRS expects future impairment charges to be at lower levels and this should, together with the improving revenue generation, lead to the Bank s return to profitability being sustainable. BoI continues to make progress in strengthening its funding and liquidity profile while reducing its usage of central bank funding. As of end-1h14 deposits now account for 74% of total funding compared to 48% at year-end 2010 and DBRS believes that this evidences the strength of the Bank s domestic franchise and the progress the Bank is making in restoring customer confidence, especially given the Bank s focus on lowering the cost of retail deposits. A key factor in the Bank s relatively low IA is its weak asset quality and the still stressed lending book. DBRS notes that the Bank reported that defaulted loans (defined as impaired loans plus loans more than 90 days in arrears) reduced in 2H13 for the first time in several years, and this trend has continued in 1H14. This is ahead of domestic peers, and the Bank s credit performance throughout the financial crisis has generally been better than domestic peers reflecting the Bank s historically more conservative risk appetite. However, when compared to global banking peers, the Bank s asset quality metrics, while reflecting the impact of the economic conditions in Ireland, also indicate a prior level of weakness in risk management. DBRS therefore views positively the improvements in the risk management framework that have taken place in recent years and that the profile of risk within the organisation is now much higher. At end-1h14 defaulted loans remained elevated at EUR 16.7 billion or 18.2% of the total gross loan portfolio. As a result of the increased impairment charge taken in 2H13 following the balance sheet assessment carried out by the Central Bank of Ireland, and then further provisions taken in 1H14 the coverage ratio (impairment provisions as a % of defaulted loans) has increased to 50% from 44% at end-1h13. Importantly, the recent reduction in defaulted loans has continued to be seen across all of the Bank s major loan portfolios. Although overall asset quality remains weak, DBRS is of the view that the Bank s asset quality will continue to improve, helped by the ongoing recovery in the economies of Ireland and the UK. The Bank has continued to strengthen its capital position in 1H14 with the transitional Basel III Common Equity Tier 1 (CET1) ratio increasing by 90 bps to 13.2%, whilst the fully-loaded ratio was 10%, an increase of 100 bps. DBRS notes that the Bank s current fully loaded and transitional Basel III CET1 ratios include the EUR 1.3 billion of remaining 2009 Preference Shares. Excluding these instruments, which the Bank intends to do by July 2016, the pro-forma fully loaded CET1 ratio would be 7.3% at end-1h14. Although this is an increase of 100 bps from end-2013, it highlights the need for the Bank to continue recording increased earnings in order to enable further capital growth. 2 Financial Institutions: Banks & Trusts

3 Rating Drivers Factors with Positive Rating Implications A continuation of the trend in improved profitability metrics, along with further progress in normalising the Bank s asset quality indicators would be viewed positively. The ratings of the Guaranteed Debt are directly linked to DBRS s rating of the Republic of Ireland. As such, any positive changes in this rating would have positive implications for the guaranteed debt. Factors with Negative Rating Implications The inability to return to an acceptable level of consistent profitability, would be viewed negatively. Further large provisioning needs resulting in capital depletion would also pressure ratings. Evidence that support from the Irish has been diminished or that the Irish government is no longer willing or able to support the Bank may lead DBRS to remove the uplift to the ratings associated with government support. A downgrade of the sovereign rating could also negatively impact the Bank s rating. The ratings of the Guaranteed Debt are directly linked to DBRS s rating of the Republic of Ireland. As such, deterioration in this rating would have negative implications for the guaranteed debt. Franchise Strength - Description of Operations DBRS views Bank of Ireland s strong domestic and Northern Irish franchise, together with the consumer banking franchise in the UK as key rating factors underpinning the intrinsic assessment. Established as a chartered corporation by an Act of the Irish Parliament of 1782, and by a Royal Charter of King George III in 1783, is the oldest bank in continuous operation in Ireland. At end-1h14 the Bank had total assets of EUR 131 billion, making it the largest financial institution in Ireland. The Group is a full service retail and commercial bank in Ireland and in Northern Ireland, a select provider of banking products in the U.K. and maintains its position in the US and European leveraged finance business. The Bank s revised EU Restructuring Plan was approved by the European Commission (EC) on July 9, The revisions, which included the Bank no longer being required to sell its life assurance subsidiary, New Ireland Assurance Company (NIAC), means that the strong Irish franchise is relatively unaffected. The primary substitution measures were (i) exiting business banking and corporate banking in Great Britain, including the deleveraging of the current businesses; (ii) exiting the intermediary channel for the origination of mortgages in Ireland; (iii) prolonging its market opening measures to end-2016; and (iv) restrictions on paying ordinary dividends were extended 1. Although the required exit from business banking and corporate banking in Great Britain will reduce the Bank s diversification away from Ireland DBRS viewed these businesses as relatively sub-scale in the scope of the United Kingdom market, and importantly this measure will not impact on the Bank s consumer businesses in Great Britain (including the partnership with the Post Office) which DBRS views as being of greater importance to the Bank s on-going franchise given the greater growth potential. The requirement to exit from the origination of new mortgages, in Ireland, through the Bank s intermediary channel and to sell or retire the distribution platform of ICS Building Society 2, is unlikely to have a major impact on the Bank s ability to compete due to the still low level of new mortgage origination in Ireland and given that this channel accounted for only around 15% of the Bank s new lending in recent years 3. 3 Financial Institutions: Banks & Trusts 1 With the sale of the 2009 Preference Shares to private investors (see Capital section) this measure is no longer relevant. 2 On 25 June 2014, Bank of Ireland agreed to sell the ICS distribution platform, together with a 250m gross performing mortgage asset pool to Dilosk Limited at par. 3 As disclosed at the time of the announcement in July 2013.

4 Corporate Structure The Group is organised in four operating divisions: Retail Ireland (ROI), Bank of Ireland Life, Retail U.K., and Corporate and Treasury, while the Group Centre mainly includes earnings on surplus capital and unallocated central overheads. 4 Financial Institutions: Banks & Trusts Retail Ireland (36% of underlying profit before impairments in 1H14) DBRS considers the Retail Ireland (RI) division the foundation of s overall strong domestic franchise. The segment incorporates the Bank s branch network and direct channels (online/mobile/phone), Mortgage Business, Consumer Banking, Business Banking and Private Banking activities in Ireland. Demonstrating the strength of the franchise, holds leading market positions in most products and services, as evidenced by the Banks market share of 25% of savings products providing 1 out of 3 new mortgages and over 50% of new SME/Agri lending in The division has strong distribution capabilities with around 250 branches supported by 1,700 ATMs in the Republic of Ireland as well as its direct telephone banking services and its online/mobile services. Bank of Ireland Life (10% of underlying profit before impairments in 1H14) Bank of Ireland Life comprises the life assurer, New Ireland Assurance Company plc (NIAC) which distributes New Ireland life assurance, protection, pensions and investment products through the Group s branch network, as well as through a direct sales force and independent brokers. Bank of Ireland Life is ranked number two in life and pensions in Ireland with an estimated 24% new business market share. As discussed above, following the approval of the Bank s revised EU Restructuring Plan, NIAC is no longer required to be sold. Retail U.K. (23% of underlying profit before impairments in 1H14) Retail U.K. incorporates the Bank s branch network and business banking operations in Northern Ireland, the UK residential mortgage business and the Group s business activities with the U.K. Post Office. As discussed above, as part of the approval of the Bank s revised EU Restructuring Plan the business banking business in Great Britain is being run-down. In Northern Ireland, the Bank offers a full retail and business banking service through 36 branches, as well as specialist motor and agriculture lending businesses. The consumer banking franchise in Great Britain is focussed on the exclusive financial services relationship and foreign exchange joint venture with the UK Post Office. Through the Post Office s network of 11,500 branches and 2,500 ATMs the Bank offers a range of retail financial services including savings, mortgages, retail foreign exchange, unsecured lending and insurance. The Bank is also currently trialling a current account product. As of end-june 2014 the business had approximately 1.6 million savings accounts and around 200,000 mortgages, as well as being the market leader in retail foreign exchange. A significant part of Retail U.K. operations are conducted through the Group s wholly owned licensed banking subsidiary, Bank of Ireland (UK) plc. The subsidiary is directly regulated by the Prudential Regulatory Authority (PRA) with depositors covered by the UK Financial Services Compensation Scheme (FSCS). Importantly the licensed subsidiary allows the Bank to offer products in the UK market that are on par, from a risk and protection standpoint, with those offered by UK banks. DBRS views the UK businesses as enhancing the overall franchise providing diversification benefits to both earnings and the risk profile. Corporate and Treasury (53% of underlying profit before impairments in 1H14) The Bank of Ireland maintains strong domestic corporate banking positions while operating internationally in niche businesses. The principal units of this division are Corporate Banking, Global Markets and IBI Corporate Finance. Corporate Banking Corporate Banking provides relationship banking services primarily to large Irish and Northern Irish corporations, financial institutions, and multinational corporations operating in, or out of Ireland. The range of lending products includes overdraft and short-term loan facilities, term loans, structured finance and project finance. Corporate Banking is also active in international lending with offices in the U.K., France, Germany and the U.S. The Bank of Ireland s international corporate lending businesses includes acquisition finance and term lending.

5 Global Markets Global Markets is responsible for executing the Group s liquidity and funding requirements, while also managing interest rate and foreign exchange risks. Global Markets trades in a range of market instruments for itself and the Group s customers. Amongst these activities are inter-bank deposits and loans, foreign exchange spot and forward contracts, options, financial futures, bonds, swaps, forward rate agreements and equity tracker products. The unit has operations in Ireland, the U.K. and U.S. IBI Corporate Finance IBI Corporate Finance provides independent financial advice to public and private companies on takeovers, mergers and acquisitions, disposals and restructurings, in addition to fund raising, public flotations and stock exchange listings. Earnings Power Bank of Ireland reported a net profit in 1H14, marking the first half year profit since 2008, excluding periods which incorporated substantial one-off profits from liability management exercises, and DBRS views these results as providing further evidence of the Bank s progress. In 1H14 BoI reported a profit before tax of EUR 399 million, a substantial improvement from the loss before tax of EUR 516 million reported in 1H13 (restated) and the loss before tax of EUR 525 million for The improved performance in 1H14 was driven by an 80% rise year-on-year (YoY) in income before tax and provisions (IBPT) and a 43% decrease in impairment charges. As a result of the Bank s focus on retail and commercial banking, net interest income represents the majority of revenues, accounting for just over 75% of operating income (net of insurance claims) in 1H14. Therefore the substantial improvement in 1H14 of the Bank s NIM 4 to 2.05%, which continued the progress seen in recent periods, is viewed positively and suggests that the Bank s return to improved profitability should be sustainable. The Bank s progress in rebuilding its NIM reflects the re-pricing of both loan and deposit portfolios, more efficient balance sheet management and higher margins on new lending. The Bank remains focused on controlling the cost base, and in line with this staff costs in 1H14 were flat on 2H13 at EUR 339 million. Although overall costs rose slightly, primarily due to FSCS (Financial Service Compensation Scheme) costs, investments in technology and increased regulatory costs, the reported cost-to-income ratio in 1H14 was 55%, a substantial improvement on the 69% reported in 1H13, and only slightly up on the 52% reported in H213. Given the EUR 41 million bank levy to be paid in 2H14, DBRS would not expect to see further improvement in the overall cost base, however further progress on income generation may mitigate this charge. Exhibit 1: Profitability Evolution % EUR million % 1.84% 1.74% 2.02% 1.46% 1.33% 1.81% 1.25% 1.40% 1.08% 1.08% H14 2.1% 1.8% 1.5% 1.2% 0.9% Income Before Provisions and Taxes (LHS) Net Interest Margin (RHS) Credit Impairments (LHS) Net Interest Margin, excl. ELG costs (RHS) Source: Bank of Ireland, DBRS 5 Financial Institutions: Banks & Trusts 4 Excluding the cost of the Eligible Liabilities Guarantee Scheme (ELG).

6 As well as the improved underlying performance the Bank s results in 1H14 also benefited from a substantial reduction in the impairment charge. This totalled EUR 444 million in the period, down from EUR 885 million in 2H13 5 and EUR 780 million in 1H13. Despite the improvement in the impairment charge, it still remains elevated at 97 bps of loans and advances, although the Bank continues to expect that this will return to more normalised levels in future periods, and is targeting a level of 55 to 65 bps over time. Due to the high level of impairments taken to date, and the ongoing recovery in the Irish domestic economy, DBRS expects future impairment charges to be at lower levels and this should, together with the improving revenue generation, lead to the Bank s return to profitability being sustainable. Funding and Liquidity Bank of Ireland continues to make progress in strengthening its funding and liquidity profile while reducing its usage of central bank funding. During 1H14 customer deposits grew by EUR 639 million to EUR 74.5 billion and as a result, deposits now account for 74% of total funding compared to 48% at year-end Within the deposit book DBRS notes that the Irish retail deposits continued to be extremely stable despite the still competitive environment and the Bank being at the forefront of lowering deposit pricing. DBRS believes that this evidences the strength of the Bank s domestic franchise and the progress the Bank is making in restoring customer confidence. As a result of the increase in customer deposits and a 2% decrease in customer loans the loan-to-deposit ratio also improved in 1H14 to 112%, from 114%. The decrease in the Bank s loan book in 1H14 reflected ongoing repayments and redemptions, and the planned refinancing in the EU mandated deleveraging portfolios in Great Britain, although this has been offset to some degree by increased new lending in both RoI and the UK. Overall usage of monetary authority funding has also reduced in 1H14 to EUR 5.8 billion (of which EUR3.8 billion was LTRO funding), from EUR 8.3 billion at end As a result of this and other actions taken in 1H14 6 the Bank s overall wholesale funding requirement reduced by 15% from end-2013, to EUR 23 billion. During 1H14 the Bank also continued to improve its access to private funding markets at lower cost with the issuance of EUR 1.5 billion of senior unsecured debt, EUR 750 million of covered bonds (Asset Covered Securities or ACS), and in June 2014 the issuance of EUR 750 million of subordinated debt, due in DBRS views this progress in regaining access to the wholesale markets positively. Exhibit 2: Funding Profile Evolution 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4% 4% 7% 6% 7% 7% 38% 40% 33% 28% 23% 21% 7% 5% 11% 5% 14% 18% 63% 67% 53% 54% 46% 37% H14 Customer accounts Monetary authority funding Wholesale funding Equity Source: Bank of Ireland, DBRS Liquidity remains satisfactory. At end-1h14 the Bank held EUR 26 billion of liquid assets. Within the portfolio, EUR 10 billion was Irish government securities or NAMA senior bonds. At end-1h14 the Bank had 5 The impairment charge in 2H13 incorporated the findings from the balance sheet assessment (BSA) carried out by the Central Bank of Ireland in Q These include the reduction in the size of the Group s loan book, an increase in Group deposits, and the sale of assets from other Group entities to Bank of Ireland (UK) plc leading to a reduction in the level of excess liquid assets in the UK subsidiary. 6 Financial Institutions: Banks & Trusts

7 EUR 14 billion of wholesale funding with less than one year to maturity, however EUR 11 billion of this is backed by maturing collateral. Therefore the liquidity position of the Bank is more than sufficient to meet the near-term unsecured maturities in the next year of around EUR 3 billion. DBRS also notes that the Bank is now disclosing its liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) ahead of their formal introduction as regulatory standards later this decade. At end-1h14 the Bank s NSFR was 116% and the LCR was 104%. Risk Profile A key factor in the relatively low intrinsic assessment of Bank of Ireland is the weak asset quality and the still stressed lending book. The Bank reported that defaulted loans (defined as impaired loans plus loans more than 90 days in arrears) reduced in 2H13 for the first time in several years, and this trend has continued in 1H14. This is ahead of domestic peers, and the Bank s credit performance throughout the financial crisis has generally been better than domestic peers reflecting the Bank s historically more conservative risk appetite. However when compared to global banking peers, Bank of Ireland s asset quality metrics, while reflecting the impact of the economic conditions in Ireland, also indicate a prior level of weakness in risk management. DBRS therefore views positively the improvements in the risk management framework that have taken place in recent years and that the profile of risk within the organisation is now much higher. Exhibit 3: Gross Loan Book Breakdown as of end-june % 9% 10% 4% 18% 56% Residential mortgages Property & construction Business & other serices Manufacturing Distribution Other Source: Bank of Ireland, DBRS Credit risk constitutes the majority of the Bank s risk profile, with credit risk weighted assets (RWAs) accounting for 90.7% of total RWAs at end-1h14. At end-1h14 impaired loans remained elevated at EUR 16.7 billion or 18.2% of the total gross loan portfolio. As a result of the increased impairment charge taken in 2H14 following the BSA, and then further provisions taken in 1H14 the coverage ratio (impairment provisions as a % of defaulted loans) has increased to 50% from 44% at end-1h13. Importantly, the recent improvement in defaulted loans has continued to be seen across all of the Bank s major loan portfolios. Although overall asset quality remains weak, DBRS is of the view that the Bank s asset quality will continue to improve, helped by the ongoing recovery in the economies of Ireland and the UK. 7 Financial Institutions: Banks & Trusts

8 EUR million 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Exhibit 4: Asset Quality H14 Total impaired loans (LHS) Gross impaired loans ratio (RHS) 19.0% 17.0% 15.0% 13.0% 11.0% 9.0% 7.0% 5.0% Source: Company reports, DBRS 8 Financial Institutions: Banks & Trusts One of the key rating factors for the Bank is the performance of the EUR 26.2 billion Irish residential mortgage portfolio. At end-1h14, impaired mortgages in this portfolio accounted for 14.1% of the total Irish mortgage book (including buy-to-let mortgages), down from 14.2% at end Owner-occupier mortgages account for 77% of the Irish residential mortgage portfolio and at end-1h % of this portfolio was impaired, down from 10.0% at end Buy-to-let (BTL) mortgages continue to perform worse than owner occupied mortgages and at end-1h14 impaired BTL mortgages accounted for 29.6% of the portfolio, up from 27.9% of the portfolio at the prior year-end. Given the size and importance of the mortgage portfolio a change in the rating trend to Stable is unlikely until there is further evidence of improvement in mortgage arrears trends, however following the further impairment charges taken in 2013 and 1H14 the specific provision levels have improved and now stand at 45% for the owner-occupier book and at 58% for the BTL book. Although house prices have increased recently, especially in Dublin, DBRS remains cautious about the future performance of the mortgage book, especially given the new personal insolvency regime in Ireland that allows for the write-off of debt in certain circumstances. However, DBRS views positively the Bank s progress in meeting the Central Bank of Ireland s mortgage arrears resolution targets through its Mortgage Arrears Resolution Strategy (MARS) where the ultimate goal is restore the customer to a level of debt sustainability. The Central Bank of Ireland targets include the Bank being required to have offered sustainable solutions to 75% of mortgage customers over 90-days arrears and for concluded solutions to reach 35% by end-june DBRS expects that the MARS will have a positive impact on the overall level of mortgage arrears in Ireland and will lead to lower impairment charges in the future but cautions that the size of the issue means that a significant improvement in the level of impaired loans is likely to only be visible in the medium-term. Credit performance within the EUR 25 billion (GBP 20.1 billion) U.K. residential mortgage portfolio has remained broadly stable and within expectations. The book is spread by product type with 45% standard mortgages, 40% BTL, and 15% self-certification. Defaulted loans in this portfolio remain low at 2.28% and below the industry average. The coverage ratio was 22% at end-1h14. In DBRS s view, the presence of the U.K. loan book adds a level of diversification, thereby reducing the overall credit risk profile. Although Bank of Ireland s property exposure has been greatly reduced reflecting transfer of assets to NAMA in 2010 and deleveraging actions taken by the Bank to reduce balance sheet risk at end-1h14 the portfolio still totalled EUR 16.7 billion, or 18% of the total portfolio. The Property and Construction (P&C) book is predominately comprised of investment loans with only EUR 3.1 billion to the highly stressed land and development sector where 89.9% of the portfolio is impaired. Provisions are high on the portfolio though and the coverage ratio at end-1h14 was 73%. Investment property comprises EUR 13.6 billion of the Property and Construction portfolio. This book is more diversified geographically with Ireland accounting for 51%, the UK for 47% and the rest of the world for the remaining 2%. By sector, retail is the largest concentration in the investment property sub-portfolio, at 36%, followed by office at 22%. Defaulted loans have reduced since end-1h13 and at 1H14 were EUR 5.7 billion, or 42% of the loan book. The improved investor sentiment to Ireland and the increasing property values in the UK should lead to an improvement in this portfolio over time.

9 The non-property SME and Corporate lending book totalled EUR 20.9 billion, or 23% of the loan portfolio at end-1h14. The portfolio is diversified across a range of sectors and geographies with 47.5% Irish SME related lending, 39.5% Corporate lending and 13% to U.K. SMEs. The most challenged of these portfolios remains the Irish SME book. At end-1h14 defaulted loans accounted for 26.7% of this portfolio reflecting the difficulties in the Irish domestic economy in recent years however the coverage ratio is now 51%. The Bank has continued to work on resolution strategies with its challenged customers and strategies have now been agreed with 9 out of 10 challenged customers, with over 90% of these now meeting the revised arrangements. DBRS notes this positively and expects it, together with the more favourable economic environment, to lead to a gradual improvement in the credit performance of the portfolio. Market risk is low. At end-1h14 market RWAs accounted for only 2.8% of total RWAs and at end-2013 value-at-risk (VaR) was at very low levels with overall interest rate VaR peaking at EUR 1.9 million and foreign exchange VaR peaking at 1.3 million in Bank of Ireland is also exposed to market risk in its life assurance business, however in DBRS s view this is closely managed and again the risk is low. Exposure to the Irish sovereign has reduced and at end-1h14 the Bank had EUR 7.3 billion of government bonds, EUR 3.2 billion of NAMA bonds and EUR 862 million of government guaranteed bank debt. Capitalisation: Structure and Adequacy Bank of Ireland has continued to strengthen its capital position in 1H14. The transitional Basel III Common Equity Tier 1 (CET1) ratio increased by 90 bps to 13.2%, whilst the fully-loaded ratio was 10%, an increase of 100 bps. The Bank s Total Capital ratio also improved in the first half of 2014 to 16.4%, up from 14.1%, reflecting the Bank s return to profitability, continued RWA reduction and the issuance of EUR 750 million subordinated debt in June Bank of Ireland s RWAs have reduced considerably in recent years, primarily driven by the deleveraging process and the muted new lending volumes, and at end-1h14, they totalled EUR 53.5 billion, a 46% decrease from % Exhibit 5: Regulatory Capital Ratios % 10% 5% EUR billion 0% H14 Tier 1 (LHS) Total capital ratio (LHS) Basel III transitional CET1 ratio (LHS) Basel III fully loaded CET1 ratio (LHS) Risk weighted assets (RHS) 50 Source: Company reports, DBRS 9 Financial Institutions: Banks & Trusts In December 2013, Bank of Ireland was able to complete a capital package involving the 2009 Preference Shares (2009 Prefs), by successively placing equity in order to redeem EUR 537 million of the 2009 Prefs previously held by the National Pensions Reserve Fund Commission (NPRFC), and arranging the sale by the NPRFC of the remaining EUR 1.3 billion 2009 Prefs to private investors, via a Special Purpose Vehicle (SPV). Importantly, this transaction allowed the Irish State to exit from its preference share investment in the Bank, whilst the SPV acquirer of the 2009 Prefs also waived the right to the original redemption step-up clause, thereby removing potential further cost for the Bank. With the completion of these transactions, has fully reimbursed the Irish State for the 2009 Prefs, and in total the Bank, since 2009, has now returned EUR 6.0 billion to the Irish State, having

10 originally received EUR 4.8 billion in capital support. DBRS views the increasing separation of the Bank from the State positively as the Bank returns to a more normal capital and ownership structure and notes that the State investment in the Bank now only consists of its 14% equity stake. This reduced from 15.1% in December 2013 as the did not participate in the placing. The sale of the EUR 1.3 billion remaining 2009 Prefs to private investors resulted in them being grandfathered until end-2017, thereby maintaining their common equity tier 1 treatment, however DBRS would expect them to be redeemed in 2016 as the Bank said at the time of the announcement: (i) that it does not intend to recognise them as regulatory common equity tier 1 capital after July 2016 (unless de-recognition would mean that an adequate capital buffer cannot be maintained above applicable regulatory requirements); and (ii) that it does not expect to redeem the Notes sold to private investors prior to 1 January 2016, save in certain limited circumstances. As a result of the current grandfathering, DBRS notes that the Bank s current fully loaded and transitional Basel III CET1 ratios include the EUR 1.3 billion of remaining 2009 Preference Shares (2009 Prefs). Excluding these instruments, which the Bank intends to do by July 2016, the pro-forma fully loaded CET1 ratio would be 7.3% at end-1h14. Although this is an increase of 100bps from end-2013, it highlights the need for the Bank to continue recording increased earnings in order to enable further capital growth. In 2013, ahead of Ireland s exit from the EU/IMF programme of support, the Central Bank undertook a Balance Sheet Assessment (BSA / AQR) on the major Irish banks, including Bank of Ireland. In December 2013, the Central Bank confirmed that Bank of Ireland had adequate capital as at end-june 2013 to meet the requirements determined under the BSA. The review did, however result in a higher impairment charge being taken in In the coming months, Bank of Ireland will be subject to the ECB s Asset Quality Review, in advance of it assuming full responsibility for supervision of banks as part of the Single Supervisory Mechanism (SSM), and the EBA stress tests. Depending on the stringency of these tests, this could potentially lead to a further capital requirement, although DBRS considers this is relatively unlikely and is of the opinion that even if it were the case the Bank would likely be able to raise equity from shareholders. 10 Financial Institutions: Banks & Trusts

11 Bank of Ireland Financial Data Bank of Ireland 30/06/ /12/ /12/ /12/2011 EUR EUR EUR EUR EUR Millions IFRS IFRS IFRS IFRS Balance Sheet Cash and deposits with central banks 4, % 6, % 8, % 8, % Lending to/deposits w ith credit institutions 5, % 5, % 9, % 8, % Financial Securities* 27, % 26, % 25, % 24, % - Trading portfolio % % % % - At fair value 10, % 10, % 9, % 8, % - Available for sale 13, % 12, % 11, % 10, % - Held-to-maturity % % % % - Other 3, % 3, % 4, % 5, % Financial derivatives instruments 3, % 3, % 5, % 6, % - Fair Value Hedging Derivatives NA % 2, % 2, % - Mark to Market Derivatives NA - 2, % 3, % 4, % Gross lending to customers 91, % 92, % 100, % 105, % - Loan loss provisions 8, % 8, % 7, % 6, % Insurance assets NA - 1, % % % Investments in associates/subsidiaries % % % % Fixed assets 1, % 1, % 1, % 1, % Goodwill and other intangible assets % % % % Other assets 4, % 3, % 3, % 5, % Total assets 130, % 132, % 147, % 154, % Total assets (USD) 179, , , ,909 Loans and deposits from credit institutions 5, % 12, % 21, % 31, % Repo Agreements in Deposits from Customers % % % % Deposits from customers 74, % 73, % 75, % 70, % - Demand 36, % 36, % 32, % 31, % - Time and savings 37, % 37, % 42, % 39, % Issued debt securities 18, % 15, % 18, % 19, % Financial derivatives instruments 3, % 3, % 5, % 6, % - Fair Value Hedging Derivatives NA % 2, % 2, % - Other NA - 2, % 3, % 3, % Insurance liabilities 9, % 8, % 7, % 7, % Other liabilities 9, % 9, % 9, % 8, % - Financial liabilities at fair value through P/L 8, % 8, % 7, % NA - Subordinated debt 2, % 1, % 1, % 1, % Hybrid Capital NA % % % Equity 8, % 7, % 8, % 10, % Total liabilities and equity funds 130, % 132, % 147, % 154, % Income Statement Interest income 1,739 3,669 4,006 4,618 Interest expenses 599 1,665 2,560 3,076 Net interest income and credit commissions 1, % 2, % 1, % 1, % Net fees and commissions % % % % Trading / FX Income % % % % Net realised results on investment securities (available for sale) % % % % Net results from other financial instruments at fair value % % % % Net income from insurance operations % % % % Results from associates/subsidiaries accounted by the equity method % % % % Other operating income (incl. dividends) % % % 1, % Total operating income 1, % 2, % 1, % 3, % Staff costs % % % % Other operating costs % % % % Depreciation/amortisation % % % % Total operating expenses % 1, % 1, % 1, % Pre-provision operating income 801 1, ,288 Loan loss provisions** 374 1,665 1,769 2,004 Post-provision operating income , Impairment on tangible assets Impairment on intangible assets Other non-operating items*** Pre-tax income , (-)Taxes (-)Other After-tax Items (Reported) (+)Discontinued Operations (Reported) (-)Minority interest Net income , Net income (USD) , *Includes derivatives w hen breakdow n unavailable, **LLP includes Impairments on financial assets, ***Incl. Other Provisions 11 Financial Institutions: Banks & Trusts

12 Off-balance sheet and other items Asset under management NA NA NA NA Derivatives (notional amount) NA 222, , ,856 BIS Risk-weighted assets (RWA) 53,500 56,400 56,521 67,135 No. of employees (end-period) 11,386 11,255 12,016 13,234 Earnings and Expenses Earnings Net interest margin [1] 1.83% 1.50% 1.00% 1.01% Yield on average earning assets 2.78% 2.74% 2.78% 3.01% Cost of interest bearing liabilities 1.19% 1.61% 2.20% 2.51% Pre-provision earning capacity (total assets basis) [2] 1.22% 0.91% 0.09% 1.44% Pre-provision earning capacity (risk-w eighted basis) [3] 2.92% 2.20% 0.22% 3.13% Net Interest Income / Risk Weighted Assets 4.26% 3.55% 2.56% 2.30% Non-Interest Income / Total Revenues 25.34% 21.41% 18.44% 60.91% Post-provision earning capacity (risk-w eighted basis) 1.55% -0.75% -2.64% 0.39% Expenses Efficiency ratio (operating expenses / operating income) 47.54% 51.25% 92.39% 42.00% All inclusive costs to revenues [4] 49.34% 55.12% % 55.34% Operating expenses by employee 127, , , ,208 Loan loss provision / pre-provision operating income 46.69% % % 87.59% Provision coverage by net interest income % % 81.74% 76.95% Profitability Returns Pre-tax return on Tier 1 (excl. hybrids) 11.37% -7.57% % -2.11% Return on equity 8.29% -6.18% % 0.29% Return on average total assets 0.52% -0.36% -1.20% 0.02% Return on average risk-w eighted assets 1.25% -0.86% -2.97% 0.04% Dividend payout ratio [5] 0.00% 0.00% 0.00% 0.00% Internal capital generation [6] 4.33% -5.74% % 0.45% Grow th Loans -3.13% -8.75% -6.74% % Deposits 1.73% -1.73% 6.62% 7.74% Net interest income 31.19% 38.59% -6.23% % Fees and commissions 16.08% 0.33% % 11.70% Expenses % % -1.15% 54.57% Pre-provision earning capacity % % % % Loan-loss provisions % -5.88% % % Net income % % % % Ris ks RWA% total assets 40.86% 42.68% 38.20% 43.40% Credit Risks Impaired loans % gross loans 17.00% 17.02% 16.27% 12.75% Loss loan provisions % impaired loans 53.82% 52.21% 46.30% 47.23% Impaired loans (net of LLPs) % pre-provision operating income [7] % % % % Impaired loans (net of LLPs) % equity 86.95% 97.89% % 70.35% Liquidity and Funding Customer deposits % total funding 74.06% 71.70% 64.70% 57.53% Total wholesale funding % total funding [8] 25.94% 28.30% 35.30% 42.47% - Interbank % total funding 5.42% 12.00% 18.41% 25.83% - Debt securities % total funding 18.07% 14.83% 15.56% 15.61% - Subordinated debt % total funding 2.45% 1.47% 1.33% 1.03% Short-term w holesale funding % total w holesale funding 45.11% 48.22% 64.46% 66.06% Liquid assets % total assets 29.12% 28.85% 29.43% 26.42% Net short-term w holesale funding reliance [9] % % % -5.71% Adjusted net short-term w holesale funding reliance [10] % % % % Customer deposits % gross loans 81.36% 79.64% 75.05% 66.72% Capital [11] Tier % 12.40% 13.92% 14.45% Tier 1 excl. All Hybrids 13.10% 12.23% 13.75% 14.31% Core Tier 1 (As-reported) 13.20% 12.20% 13.80% 14.30% Tangible Common Equity / Tangible Assets 5.06% 4.70% 4.36% 5.20% Total Capital 16.41% 13.56% 15.31% 14.73% Retained earnings % Tier % 63.95% 67.87% 43.19% [1] (Net interest income + dividends)% average interest earning assets. [2] Pre-provision operating income % average total assets. [3] Pre-provision operating income % average total risk-weighted assets. [4] (Operating & non-op. costs) % (op. & non-op. revenues) [5] Paid dividend % net income. [6] (Net income - dividends) % shareholders' equity at t-1. [7] We take into account the stock of LLPs in this ratio. [8] Whole funding excludes corporate deposits. [9] (Short-term w holesale funding - liquid assets) % illiquid assets [10] (Short-term w holesale funding - liquid assets- loans maturing w ithin 1 year) % illiquid assets [11] Capital ratios of Interim results exclude profits for the year * Interim information is annualised w here needed. 12 Financial Institutions: Banks & Trusts

13 Ratings Issuer Debt Rated Rating Trend Issuer Rating BBB Negative Non-Guaranteed Long-Term Debt BBB Negative Non-Guaranteed Long-Term Deposits BBB Negative Non- Guaranteed Short-Term Debt Negative Non-Guaranteed Short-Term Deposits Negative Long-Term Debt Guaranteed by Irish A Stable Long-Term Deposits Guaranteed by Irish A Stable Short-Term Debt Guaranteed by the Irish Stable Short-Term Deposits Guaranteed by the Irish Stable Dated Subordinated Notes due Sept 2015 BB Negative (ISIN CA062786AA67) Dated Subordinated Notes due Sept 2018 (ISIN CA062786AD07) BB Negative Floating Rate Subordinated Notes due 2017 BB Negative Bank of Ireland UK Holdings plc Subordinated Notes due 2020 (ISIN XS ) Subordinated Notes due 2020 (ISIN XS ) Perpetual Preferred Securities (ISIN XS ) BB BB B Negative Negative Negative 13 Financial Institutions: Banks & Trusts

14 Ratings History Issuer Debt Rated Current Issuer Rating BBB BBB BBB BBB A Non-Guaranteed Long-Term BBB BBB BBB BBB A Debt Non-Guaranteed Long-Term BBB BBB BBB BBB A Deposits Non-Guaranteed Short-Term Debt (middle) Non-Guaranteed Short-Term Deposits (middle) Long-Term Debt Guaranteed A A A A A by the Irish Long-Term Deposits A A A A A Guaranteed by the Irish Short-Term Debt Guaranteed by the Irish (middle) Short-Term Deposits Guaranteed by the Irish Dated Subordinated Notes due Sept 2015 (ISIN CA062786AA67) Dated Subordinated Notes due Sept 2018 (ISIN CA062786AD07) Floating Rate Subordinated Notes due 2017 (ISIN XS ) Subordinated Notes due 2020 (ISIN XS ) Subordinated Notes due 2020 (ISIN XS ) Dated Subordinated Debt BB C C C BB BB C C C BB BB C C C BB (middle) BB C C C BB BB C C C BB Disconti D D D BB nued Primary Capital Notes Disconti D D D BB nued Bank of Ireland UK Holdings Perpetual Preferred Securities B C C C BB plc (ISIN XS ) Bank of Ireland UK Holdings Perpetual Preferred Securities Disconti D D D BB plc (ISIN XS ) nued BOI Capital Funding (No 1) LP Perpetual Preferred Securities Disconti D D D B nued BOI Capital Funding (No 2) LP Perpetual Preferred Securities Disconti D D D B nued BOI Capital Funding (No 3) LP Perpetual Preferred Securities Disconti D D D B nued BOI Capital Funding (No 4) LP Perpetual Preferred Securities Disconti D D D B nued 14 Financial Institutions: Banks & Trusts

15 Notes: All figures are in Euros unless otherwise noted. Copyright 2014, DBRS Limited, DBRS, Inc. and DBRS Ratings Limited (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is obtained by DBRS from sources DBRS believes to be accurate and reliable. DBRS 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 extent of any factual investigation or independent verification depends on facts and circumstances. DBRS ratings, reports and any other information provided by DBRS are provided as is and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings and other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell or hold any securities. A report providing a DBRS rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings and from subscribers to its website. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS. ALL DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT ADDITIONAL INFORMATION REGARDING DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON 15 Financial Institutions: Banks & Trusts