Warning to B of I on credit rating due to slow recovery

BANK OF Ireland was warned that its credit rating may be downgraded by ratings agency Standard & Poor’s, which cited the likelihood of a slow Irish economic recovery.

The bank’s €3.5 billion capital-raising earlier this year was praised by S&P, which affirmed the bank’s “A-” credit rating, but said it faced “considerable challenges” to restoring its credit profile.

S&P reduced the bank’s outlook from “stable” to “negative”, meaning it may face a ratings downgrade in the medium term.

“The Irish economy is likely to recover only quite slowly, with household finances remaining stretched, asset prices unlikely to start appreciating materially for a couple of years, and credit demand remaining muted for many years,” the agency said.

The bank’s shares fell 4.3 per cent, or 3.1 cent, to 69 cent.

S&P analyst Giles Edwards said the bank had made “good progress in recent months, particularly with regard to the capital-raising”.

The bank should also be able to maintain its strong domestic franchise, “useful” overseas presence and generally supportive business profile, the agency said, but it expects the bank to recover over an extended timeframe.

“The tricky task, in our view, for BoI, like its domestic peers, [lies] in becoming less dependent on Government-backed funding over the coming several months, and the risk that this may set back BoI’s progress in improving its funding profile,” said the agency.

S&P affirmed its “A-/A-2” long- and short-term counterparty credit ratings for the bank, but said a negative outlook “better reflected” the challenges facing the recovery of the bank.

“Negative rating action would most likely follow from a weakening of Government support, adverse economic developments, or a setback in BoI’s restructuring that materially delays the strengthening of its financial profile,” S&P said in a statement.

The agency said it expected that, over time, the bank would be successful in restoring its current “BB+” stand-alone credit profile to the “A-” rating level as its financial profile strengthens, but warned that it did not expect this to happen within a two-year period.

S&P said the ratings on the bank benefited from four notches of support, more than many state-supported European banks.

Bank of Ireland’s capital-raising in June boosted the bank’s loss-absorbing reserves by €2.9 billion – above the €2.66 billion set by the Financial Regulator to cover rising losses, primarily on €12.2 billion of loans transferring to the National Asset Management Agency.

The bank was the first Irish domestic institution to meet the regulator’s new capital rules.

In a separate development, Bank of Ireland notified the stock exchange that the Government had taken a 36 per cent stake in the bank arising from the capital-raising plan earlier this year.