International credit ratings agency Moody’s has downgraded Bank of Ireland’s senior debt and deposit ratings by one notch, from Ba2 to Ba3, on concerns that it may fail next year’s European bank stress tests.
Despite passing the Central Bank’s latest balance sheet assessment/ asset quality review earlier this month, the Central Bank increased its estimates for how much BoI might need for loan impairment provisions; despite the bank stating that a large proportion of the estimated extra €1.4bn has already been factored into its own calculations.
That assessment will form part of next year’s European Central Bank stress tests and Moody’s, yesterday, cited an increased risk to BoI bondholders, arising from “ongoing asset-quality challenges that have the potential to put pressure on BoI’s capital levels beyond the expectations of the Prudential Capital Assessment Review undertaken by the Irish regulator in 2011” for its decision.
In a statement, Moody’s said it is concerned that “these underlying asset quality problems, reflected in the continued rise in non-performing loans and the low level of provisions, leave the bank in a more vulnerable position to face the stress test the ECB will conduct in 2014 as part of its comprehensive assessment of European banks.”
It added: “There remains considerable uncertainty surrounding the stress testing process and the key parameters it will incorporate — for example loss rates, target capital levels, corrective windows — which make the outcome difficult to anticipate.
However, in Moody’s opinion, banks such as BoI, with vulnerable lending books, relatively low provisions and poor profitability, are at relatively greater risk of ‘failing’ the stress test.”
At the same time, Moody’s believes that BoI’s increasingly visible return to sustainable profitability should help it to offset some of these asset quality and capital pressures, while the potential for the bank to tap the private capital markets for equity injections should also be a further protection for bondholders.
Bank of Ireland’s share price was down by 0.76%, yesterday, at 26c.
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