MOODY’S INVESTMENT SERVICE has downgraded Bank of Ireland’s (BOI) deposit ratings reflecting Moody’s view of an increased risk to bondholders.
In a statement they said “deposit ratings to Ba2/NP from Ba1/NP and senior debt ratings to Ba3 from Ba2, prompted by the concurrent lowering of the bank’s baseline credit assessment (BCA) by two notches to b1 from ba2″.
Moody’s has also downgraded the deposit ratings of BOI’s subsidiary ICS Building Society to Ba2/NP and lowered its BCA to b1.
They explained the reasoning behind the downgrade stating “ongoing asset-quality challenges have the potential to put pressure on BOI’s capital levels”. They said they believed these had gone beyond what was expected of the Prudential Capital Assessment Review (PCAR) undertaken by the Irish regulator in 2011.
They added that these pressures are at least “partially reflected in the adjustments required by the Central Bank of Ireland, following its Balance Sheet Assessment of BOI”.
In addition they said the closely-related risk for BOI’s bondholders stemming from the prospect of the stress test that will be undertaken by the European Central Bank in 2014.
However they said the the design of the stress test remains unclear and the results are “difficult to anticipate”.
Poor lending books
Moody’s said banks like BOI with “poor quality lending books, relatively low levels of provisions and poor profitability are at relatively greater risk of ‘failing’ the test”.
Therefore they said that any resulting material capital shortfall, if it cannot be remedied by BOI or its shareholders within a certain, still undefined period, directly raises the risks for BOI’s bondholders.
The investor service acknowledged that BOI was on an “increasingly visible return path to sustainable profitability” which they said should help it to offset some of these asset quality and capital pressures.
They added that the “moderate expectation of support” from the Irish government leads to a one-notch uplift for BOI’s senior unsecured debt ratings.
In line with previous government actions to support depositors, Moody’s continues to incorporate a higher degree of support likelihood for BOI’s deposits, resulting in two notches of rating uplift from the standalone BCA.