S&P eyes government support as it downgrades BoI

Questions over the degree of support that the Government will lend to banks were key to Standard and Poor’s (S&P) decision to downgrade Bank of Ireland and maintain a negative outlook on AIB, PTSB and Ulsterbank Ireland.

In a review of European banks, ratings agency S&P examined 75 banks, of these 15 were revised down including Bank of Ireland, while the ratings agency maintained its negative outlook on 38 banks.

Key to the decision in downgrading Bank of Ireland and maintaining the negative outlook on the other Irish banks is down to a normalisation in the degree of support that governments are giving to banks.

In their research S&P said “We consider that potential extraordinary government support for European banks will likely decrease as resolution frameworks are put into place.”

The ratings agency said as a result of this there was a risk that unsecured bondholders could be burned in the future.

“The negative outlook reflects the possibility that we may lower the long-term rating by one notch by year-end 2015 if we believe there is a greater likelihood that senior unsecured liabilities may incur losses if the bank fails,” S&P said.

Looking at AIB, the ratings agency said it had delivered weaker than expected results in 2013. “AIB’s year-end 2013 risk-adjusted capital ratio will be well below the 3% threshold to which we ascribe a ‘weak’ capital and earnings assessment,” S&P said.

However, they did not further downgrade the bank as they believe the Government will begin selling its holdings in the bank resulting in an equity boost for the institution.

The biggest threat to PTSB is its mortgage book which S&P said will continue to perform poorly. The ratings agency warned that the bank’s capitalisation may fall again resulting in it being downgraded.

Ulster Bank was given a slightly more positive outlook due to its parent company, Royal Bank of Scotland. However it suffers from many of the same issues as PTSB.

“We expect that Ulster Bank will play a meaningful role in the small, but concentrated, banking markets that are emerging across the island of Ireland. We maintain our view, however, that Ulster Bank will remain one of the weakest performing parts of RBSG for the next two years. We continue to see major challenges ahead for Ulster Bank’s management team, including the need to carefully manage the still-sizeable stock of core non-performing mortgages, and to deleverage the bad bank assets without destroying further capital,” the ratings agency said.