Irish bank stocks rise on debt ratings upgrades

Irish banking stocks rose on Thursday in the wake of debt ratings upgrades overnight from Moody’s and Standard & Poor’s, as lenders continue to reduce their problem loans and maintain healthy levels of capital to protect themselves against shock losses.

Standard & Poor's (S&P) upgraded its main credit rating for Permanent TSB (PTSB) by one level to BBB-, returning it to what's considered investment grade, after the bank recently successfully issued €300 million of bonds that can be converted into equity if the bank runs into trouble in future.

However, the ratings firm highlighted that PTSB lacks business diversity, as it remains focused on home loans, and has weak profitability prospects.

“The Irish Government owns about 75 per cent of PTSB’s ordinary shares. We consider the Government unlikely to reduce its stake in the near term. The process of returning the bank to full private ownership will probably take several years,” S&P said. “That said, capital distribution could be discussed in one or two years.”

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Moody’s raised its long-term issuer rating for PTSB by two notches to Ba1, which remains one rung below investment grade. It noted that the bank had lowered its non-performing loans (NPLs) to 7.2 per cent of its total loan book from 10 per cent through the sale of about €500 million of troubled mortgages in September. The ratio had been as high as 28 per cent at the start of last year.

AIB rating

AIB’s unsecured bonds rating was upgraded to by one level to Baa2 at Moody’s as it has also continued to lower its NPLs level. “AIB’s strong profitability and capital, despite some expected decline, continue to provide a strong loss absorption cushion,” it said.

AIB is expected by analysts to start returning some of its excess capital to shareholders, led by the Government, which owns a 71 per cent stake, next year, assuming it gets regulatory approval.

Meanwhile, Moody's upgraded Bank of Ireland's long-term rating to Baa2 from Baa3, as the lender's NPLs ratio declined to 4.9 per cent in June from 5.9 per cent in December. The ratings firm sees the bank's NPLs ratio falling to close to 3.5 per cent by the end of this year, which is broadly in line with the European Union average that regulators in the European Central Bank are pushing for banks to achieve.

“The outlook on BOI’s and BOI Group’s ratings is stable reflecting the agency’s expectation that the bank will reduce legacy problem loans further while maintaining its strong capitalisation and continue to report moderate profitability, which remains structurally weaker, due to a higher share of tracker mortgages, lower share of SMEs and higher operational costs, than that of its main Irish peer,” Moody’s said.

Shares in PTSB closed 8.1 per cent higher at €1.04, while Bank of Ireland gained 1.9 per cent and AIB added 2.5 per cent. The sector had traded higher the previous day on mounting conviction among traders that UK prime minister Boris Johnson's Conservative Party will secure an overall majority in parliamentary elections next week and push through his EU withdrawal deal.