Credit Opinion: Ulster Bank Ireland Limited

Transcription

1 Credit Opinion: Ulster Bank Ireland Limited Global Credit Research - 10 Nov 2014 Dublin, Ireland Ratings Category Moody's Rating Outlook Negative(m) Bank Deposits Baa3/P-3 Bank Financial Strength E+ Baseline Credit Assessment b3 Adjusted Baseline Credit Assessment baa3 Senior Unsecured MTN Subordinate (P)Baa3 Ba2 Commercial Paper -Dom Curr Other Short Term P-3 (P)P-3 Ult Parent: Royal Bank of Scotland Group plc Outlook Senior Unsecured Negative Baa2 Subordinate B1 Jr Subordinate Pref. Stock -Fgn Curr B1 (hyb) B2 (hyb) Pref. Stock -Dom Curr Pref. Stock Non-cumulative B2 (hyb) B2 (hyb) Preference Shelf Commercial Paper (P)B2 P-2 Other Short Term (P)P-2 Contacts Analyst Phone Dany Castiglione/London Carlos Suarez Duarte/London Johannes Wassenberg/London Key Indicators Ulster Bank Ireland Limited (Consolidated Financials)[1] [2]12-13 [2]12-12 [2]12-11 [2]12-10 [2]12-09 Avg. Total Assets (EUR million) 35, , , , ,992.0 [3]-8.7 Total Assets (USD million) 48, , , , ,160.3 [3]-9.7 Tangible Common Equity (EUR million) 4, , , , ,076.0 [3]3.1 Tangible Common Equity (USD million) 6, , , , ,848.0 [3]2.1 Net Interest Margin (%) [4]1.3 PPI / Average RWA (%) [5]1.0 Net Income / Average RWA (%) [5]-7.2 (Market Funds - Liquid Assets) / Total Assets (%) [4]25.1 Core Deposits / Average Gross Loans (%) [4]43.4 Tier 1 Ratio (%) [5]10.4 Tangible Common Equity / RWA (%) [5]14.5 Cost / Income Ratio (%) [4]60.7

2 Problem Loans / Gross Loans (%) [4]31.9 Problem Loans / (Equity + Loan Loss Reserves) (%) [4]103.3 Source: Moody's [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel II; IFRS [3] Compound Annual Growth Rate based on IFRS reporting periods [4] IFRS reporting periods have been used for average calculation [5] Basel II & IFRS reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE We rate the deposits of Ulster Bank Ireland Limited (UBIL) Baa3/P-3. The ratings are underpinned by the bank's baseline credit assessment (BCA) of b3 equivalent to a bank financial strength rating (BFSR) of E+ and by our assessment of a very high likelihood of support coming from Royal Bank of Scotland plc (RBS - rated Baa1/Neg; D+/Neg). This level of parental support incorporates our view that the Ulster Bank Group (including both Ulster Bank Limited - UBL - incorporated in Northern Ireland and its wholly-owned subsidiary - UBIL - incorporated in the Republic of Ireland) remains as an integral part of RBS's current strategy. At present, Moody's expects this high level of commitment to remain and has therefore continued to reflect this in the high level of parental support in the deposit ratings of UBIL. As a wholly-owned subsidiary of a UK-domiciled and Prudential Regulation Authorityregulated institution we believe that the bank would potentially benefit from the systemic support that is incorporated in the ratings of RBS. The b3 BCA reflects (1) the bank's significant asset quality challenges, (2) the downside risks associated with RBS' planned cost restructuring and disposals and (3) UBIL's ongoing dependence on parental support for funding and capital (if required). UBIL was one the banks which were reviewed by the European Central Bank (ECB) as part of its Comprehensive Assessment (CA) that consisted of a supervisory judgment on key risks and an asset quality review alongside a stress test, the results of which were published in October 2014 (see note 1 at the end of this report); the CA did not show any capital shortfall for UBIL in the asset quality review, or in the baseline and adverse scenarios. Rating Drivers - Ongoing asset quality challenges pose downside risks - RBS' restructuring plan affects Ulster Group's strategy - Reliance on high level of support from RBS for capital and funding Rating Outlook The outlook on the Baa3 bank deposit rating is negative, in line with the outlook on RBS' standalone and senior ratings. The outlook is stable on the b3 standalone assessment, reflecting the bank's increased provision coverage and the decline in impairment losses in its core portfolio. What Could Change the Rating - Up Given the gradual improvement in the operating environment in Ireland, upward pressure on the ratings of UBIL could develop from (1) the successful deleveraging and or disposal of the non-core commercial assets in a capital accretive manner; (2) a related decrease in funding needs resulting in a substantial reduction in the dependence on RBS for funding; (3) improvement in the asset quality of the remaining core loan book; and (4) a return to sustainable profitability. What Could Change the Rating - Down Negative pressure on UBIL's debt ratings could develop following (1) any indication of RBS' intention to weaken its ties to Ulster Bank Group; (2) unexpected losses beyond those that Moody's presently estimates will follow the workout of Ulster Bank Group's assets in the RBS Capital Resolution (RCR), resulting in a deterioration of capital

3 levels; or (3) a downgrade of RBS' long-term and deposit ratings. DETAILED RATING CONSIDERATIONS ONGOING ASSET QUALITY CHALLENGES POSE SIGNIFICANT DOWNSIDE RISKS Ulster Bank Group (core and RCR) reported a problem loan ratio (defined as Risk Elements in Lending - REIL - over gross loans) of 45.1% at end-june 2014 stable from the year-end 2013 and significantly above the average problem loan ratio of Irish rated banks of about 30%. The asset quality of Ulster Bank Group's mortgage portfolio has performed relatively better than its Irish peers. The problem loan ratio for this portfolio was 18.2% at end-june 2014 (when the Irish average of mortgage arrears is 25% - see Note 2). This is partly explained by the lower proportion of buy-to-let mortgages (12% of the portfolio against an Irish average of 22% - Note 3). Impairment charges have decreased materially (GBP35 million in the first half of 2014 compared with GBP181 million in the first half 2013). A large part of Ulster Bank Group's asset quality issues arise from the exposure to commercial real estate, most of which is being wound down as part of the RCR. Commercial real estate loans in the RCR were 97% impaired at end-june While this reflects past risk management failures it also reflects the fact that, unlike the domestic Irish banks, Ulster Bank Group's did not transfer its CRE development loans to the National Asset Management Agency (NAMA) in As part of RBS's new strategy for its legacy portfolio announced in November 2013, most of Ulster Bank Group's commercial real estate loans have been targeted for accelerated disposal over the next three years. As a result, Ulster increased the provision coverage of its CRE problem loan ratio (as defined by the bank) to 78% as of December 2013 from 58% as of December This reduces the downside risk generated by these exposures and will likely help to improve Ulster Bank Group's asset quality metrics. However, as long as these assets remain on UBIL's balance-sheet, any potential deterioration in the commercial lending market in Ireland would pose negative pressure on the bank's capital ratios because it will limit its ability to sell assets in a capital-accretive way. RBS' RESTRUCTURING PLAN AFFECTS ULSTER GROUP'S STRATEGY Improvements in profitability of the bank's core business have been offset by the sizable amount of impairment charges. In 2013, the bank took a sizable amount of provisions following the creation of RCR. Although we expect some improvements in 2014, profitability is also constrained by the high proportion of tracker mortgages in the bank's balance sheet (66% of mortgages at end-june 2014). The cost-to-income ratio of Ulster Bank Group's is lower than most of its Irish peers as the entity's cost structure benefits from its integration with RBS. However, RBS announced that it is currently reviewing the cost structure of its core businesses including Ulster because it targets a sizable reduction in its cost base. Although we see this as credit positive, we believe that it carries execution risk since the bank would like to avoid damaging its franchise. In addition to RBS reiterating its commitment to continue doing business in Northern Ireland, it has also announced that Ulster would position itself as a challenger bank to the domestic pillar banks in the Republic of Ireland. Restructuring costs could have a negative effect in the short to medium term and diminish the franchise value. However, the bank will likely benefit from the gradual recovery of the Irish economy and lower impairment charges as it reduces the size of its non-core portfolio. RELIANCE ON HIGH LEVEL OF SUPPORT FROM RBS FOR CAPITAL AND FUNDING Retail and corporate deposits account for about 66% of UBIL's funding at year-end The bank continues to rely on RBS and other related parties for 20% of its funding, however we note that a successful run down of the bank's legacy assets would help to improve its funding profile. Ulster has also received significant capital support from RBS over the past years: between 2009 and 2013, UBIL has received a cumulative EUR13.5 billion of capital contribution from RBS. Given the substantial support provided in the past, we assume RBS will continue to support UBIL's compliance with minimum regulatory capital and liquidity requirements. This assumption drives the high level of parental support uplift in UBIL's ratings. Note 1 - Please refer to the Special Comment entitled "Results of ECB's Comprehensive Assessment Reveal Broad Resilience of Bank's Balance Sheets to Adverse Conditions", published on 27 October 2014.

4 Note 2 - Source: Central Bank of Ireland "Residential Mortgage Arrears and Repossessions Statistics" Note 3 - Source: Central Bank of Ireland "Residential Mortgage Arrears and Repossessions Statistics" Global Local Currency Deposit Rating (Joint Default Analysis) UBIL's global local currency (GLC) and foreign currency deposit ratings are Baa3/P-3. These reflect the bank's standalone rating of b3 as well as Moody's current assessment of a very high probability of support from the bank's parent, RBS plc (rated Baa1/Neg; D+/Neg), given the increasing degree of strategic and operational integration between Ulster Bank Group and the RBS Group. Notching Considerations UBIL has not issued any junior securities, however dated subordinated debt, originally issued by First Active, an Irish bank merged into Ulster in 2009, is rated Ba2, in line with the dated subordinated debt of RBS plc. Foreign Currency Deposit Rating The Foreign Currency Deposit ratings of UBIL are Baa3/P-3. Foreign Currency Debt Rating The Foreign Currency Debt ratings of UBIL are Baa3/P-3. Rating Factors Ulster Bank Ireland Limited Rating Factors [1] A B C D E Total Score Trend Qualitative Factors (50%) D- Factor: Franchise Value D- Market share and sustainability x Geographical diversification x Earnings stability x Earnings Diversification [2] Factor: Risk Positioning E Corporate Governance [2] - Ownership and Organizational Complexity - Key Man Risk - Insider and Related-Party Risks Controls and Risk Management x - Risk Management x - Controls x Financial Reporting Transparency x - Global Comparability x - Frequency and Timeliness x - Quality of Financial Information x Credit Risk Concentration Borrower Concentration Industry Concentration Liquidity Management x Market Risk Appetite x Factor: Operating Environment C+ Economic Stability x Integrity and Corruption x Legal System x

5 Financial Factors (50%) D Factor: Profitability E+ PPI % Average RWA (Basel II) 1.09% Net Income % Average RWA (Basel II) -7.30% Factor: Liquidity E (Market Funds - Liquid Assets) % Total Assets 20.58% Liquidity Management x Factor: Capital Adequacy A Tier 1 Ratio (%) (Basel II) 11.07% Tangible Common Equity % RWA (Basel II) 15.19% Factor: Efficiency C Cost / Income Ratio 55.42% Factor: Asset Quality E Problem Loans % Gross Loans 39.72% Problem Loans % (Equity + LLR) % Lowest Combined Financial Factor Score (15%) E Economic Insolvency Override Neutral Aggregate BFSR Score D- Aggregate BCA Score ba3 Assigned BFSR E+ Assigned BCA b1 [1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. [2] - A blank score under Earnings Diversification or Corporate Governance indicates the risk is neutral. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATION") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR

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