Outlook On Bank of Ireland Revised To Stable On Improved Business Stability; 'BB+/B' Ratings Affirmed

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1 Research Update: Outlook On Bank of Ireland Revised To Stable On Improved Business Stability; 'BB+/B' Ratings Primary Credit Analyst: Nigel Greenwood, London (44) ; Secondary Contact: Alexandre Birry, London (44) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List JULY 16,

2 Research Update: Outlook On Bank of Ireland Revised To Stable On Improved Business Stability; 'BB+/B' Ratings Overview We consider that Bank of Ireland (BOI) is progressing further in normalizing its earnings and balance sheet profile than its Irish peers, in the context of a very difficult operating environment. We are therefore revising our outlook on BOI to stable from negative. At the same time, we are affirming our 'BB+/B' ratings on BOI. The stable outlook reflects our expectation that BOI will return to pre-tax profitability sooner than its peers, possibly in 2014, and our view that the impact of rising mortgage book risk on its capitalization appears manageable at the current ratings level. Rating Action On July 16, 2013, Standard & Poor's Ratings Services revised its outlook on Bank of Ireland (BOI) to stable from negative. At the same time, we affirmed our 'BB+/B' long- and short-term counterparty credit ratings on BOI. Rationale The outlook revision reflects our view that BOI is demonstrating greater progress in normalizing its earnings and balance sheet profile than its Irish peers, within a very difficult operating environment. We anticipate that BOI will return to pre-tax profitability ahead of peers because in our view it is better placed to adjust its deposit pricing and generate new lending. Furthermore, we consider weaknesses in its loan book to be less substantial. We expect a steady improvement in BOI's pre-provision operating income this year and next, combined with a decline in loan impairment charges, such that pre-tax profits in 2014 are now a reasonable possibility. We also believe that BOI's domestic mortgage book will perform a little better than peers'. This is an important consideration in our ratings analysis because we expect mortgage write-offs to accelerate across the industry now that a legislative gap preventing foreclosures has been closed. JULY 16,

3 Research Update: Outlook On Bank of Ireland Revised To Stable On Improved Business Stability; 'BB+/B' Ratings BOI has in our view made greater progress than peers in improving its funding and liquidity profiles. In particular, in May 2013, BOI was able to issue the first senior unsecured, unguaranteed bond by an Irish bank since BOI states that its loan-to-deposit ratio was 120% at March 31, 2013, and that monetary authority drawings have reduced to 11 billion, or about one-third of total funding, from 33 billion at Dec. 31, BOI's deposit base is also well-diversified, and corporate deposits, which can be more unreliable, occupy only a relatively minor space. That said, we consider that the transformation of BOI's overall funding and liquidity profiles remains incomplete. Capital remains a ratings weakness for BOI, in our opinion. Our measures indicate that BOI's capitalization is not as strong as that implied by the bank's reported core Tier 1 ratio of 13.8% at March 31, Irish banks are required to maintain a minimum ratio of at least 10.5%. The difference in opinion reflects our higher risk weightings for certain assets and the fact that we exclude 1.8 billion of preference shares issued by BOI to the Irish government, and 1.5 billion of tax loss carryforwards. Through to year-end 2014, we expect BOI's risk-adjusted capital (RAC) ratio to be about 3.5%-4.0%. We calculate this ratio to be 3.7% at Dec. 31, On July 9, 2012, the European Commission authorized changes to BOI's previously agreed restructuring plan. In particular, BOI is no longer required to divest New Ireland Assurance Company, a key part of Bank of Ireland Life. Conversely, BOI has agreed to exit from business banking and corporate banking in Great Britain, which had gross loans of 4.6 billion at Dec. 31, 2012 (about 5% of the group's total). We don't believe that these developments materially affect our view of BOI's relative business position or its capitalization. Outlook The stable outlook reflects our expectation that BOI will return to pre-tax profitability sooner than its Irish peers, possibly in It also reflects our view that rising mortgage book risk, which could threaten BOI's capitalization, appears manageable at the current ratings level. We could lower the ratings if capitalization weakens further than we anticipate. Weaker-than-expected asset quality or BOI's failure to improve pre-provision operating income could trigger this. We note that, over time, Irish loans (net of provisions) may comprise a higher proportion of the total loan book, for example as result of the downsizing of its business and corporate banking franchises in Great Britain. An increase in the weighted-average loan exposure to Ireland by around 5% (from about 50% today) would lead us to revise our assessment of BOI's anchor to 'bb' from 'bb+'. However, we assume that if that happens, our assessment of BOI's liquidity will have improved sufficiently for us to compensate for this. JULY 16,

4 Research Update: Outlook On Bank of Ireland Revised To Stable On Improved Business Stability; 'BB+/B' Ratings An upgrade would likely require continued evidence that BOI is outperforming its peers, and that capitalization has materially improved. Over time, a more positive assessment of Irish economic risk may also support the ratings on BOI. Ratings Score Snapshot Issuer Credit Rating BB+/Stable/B SACP bb Anchor bb+ Business Position Strong (+1) Capital and Earnings Weak (-1)* Risk Position Adequate (0) Funding and Liquidity Average and Moderate (-1) Support +1 GRE Support 0 Group Support 0 Sovereign Support +1 Additional Factors 0 SACP--Stand-alone credit profile. *When a bank's SACP, derived from our BICRA methodology, is in the 'bb' category and its common equity regulatory tier 1 ratio is greater than the local regulatory requirements, a "weak" assessment of capital and earnings has a minus one-notch impact on the SACP, rather than two (see paragraph 88 of our bank criteria). Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. Various Rating Actions Taken On Irish Banks Following Sovereign Review, July 16, 2013 Banking Industry Country Risk Assessment: Ireland, July 16, 2013 Research Update: Outlook On Ireland Revised To Positive On Improved Prospects For Debt Reduction; Ratings At 'BBB+/A-2', July 12, 2013 Bank of Ireland Proposed Dated Nondefferable Subordinated Debt Issue To Be Rated 'B'; Existing Sub Debt Ratings Raised, Dec. 14, 2012 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Bank Hybrid Capital Methodology And Assumptions, Nov. 1, JULY 16,

5 Research Update: Outlook On Bank of Ireland Revised To Stable On Improved Business Stability; 'BB+/B' Ratings Bank Capital Methodology And Assumptions, Dec. 6, 2010 Ratings List Ratings ; CreditWatch/Outlook Action To From Bank of Ireland Counterparty Credit Rating BB+/Stable/B BB+/Negative/B Ratings Bank of Ireland Certificate Of Deposit BB+/B Bank of Ireland Senior Unsecured BB+ Subordinated B Preference Stock B- Commercial Paper B Bank of Ireland U.K. Holdings PLC Junior Subordinated* B- *Guaranteed by Bank of Ireland. Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) JULY 16,

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