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Fitch: Irish Banks' Dividend Contrast Highlights Pension Impact
March 6, 2017 / 12:51 PM / 9 months ago

Fitch: Irish Banks' Dividend Contrast Highlights Pension Impact

(The following statement was released by the rating agency) LONDON, March 06 (Fitch) The contrasting dividend news last week from the two largest Irish banks highlights the impact of pension scheme volatility on banks' capital management, particularly when capital headroom is limited, Fitch Ratings says. Allied Irish Banks (AIB) announced its first dividend since 2008 but Bank of Ireland (BOI) plans to wait another year before resuming dividends, citing recent volatility in its pension scheme deficit as a factor. The banks' common equity Tier 1 (CET1) ratios are exposed to differing degrees of volatility in their pension schemes, mostly driven by changes in corporate bond yields used to discount pension liabilities under IFRS. BOI's capital position is more susceptible, as the bank's fully loaded CET1 ratio of 12.3% is only slightly higher than its stated long-term target of above 12%. In 1H16, an increase in BOI's pension scheme deficit reduced its CET1 ratio by 80bp. Although BOI's deficit has since narrowed, the bank wants to see a sustained improvement before resuming dividends. In contrast, AIB's fully loaded CET1 ratio of 15.3% (post-dividend) gives it headroom to absorb volatility and resume dividends. <iframe src="// ed" title="Irish Banks - Pension Scheme Deficits" width="550" height="611" scrolling="no" frameborder="0"> AIB's and BOI's credit fundamentals are on a positive trajectory, with improving capitalisation driven by deleveraging, capital structure simplification and solid internal capital generation. In particular, AIB's CET1 ratio benefits from the partial conversion of the bank's government-held preference shares in December 2015, which resulted in a net increase in common equity of EUR1.8 billion, or 300bp of end-2015 fully loaded risk-weighted assets. Asset quality, the main rating weakness for both banks, is also improving, as the banks manage down their stock of impaired loans, helped by property price growth, investor demand and a low inflow of new impaired loans. BOI's asset quality is better than AIB's, reflecting its lower stock of impaired loans and its better-performing UK residential mortgages. BOI's impaired loans ratio fell to 8% at end-2016 (end-2015: 11%) compared with 14% for AIB (end-2015: 19%). Both banks still have high proportions of forborne loans, low-yielding loans, including tracker mortgages, and defaulted but not impaired loans. However, we expect asset quality to continue improving in 2017, underpinned by a supportive operating environment, strong demand from investors for Irish commercial property and the banks' proactive approach to reducing their legacy assets. The ratings of AIB (BB+) and BOI (BBB-) are on Positive Outlook and may be upgraded if asset quality and capitalisation continue to improve. Contact: Marc Ellsmore Associate Director +44 20 3530 1438 Fitch Ratings Limited 30 North Colonnade London E14 5GN Joanna Drobnik, CFA Director +44 20 3530 1318 David Prowse Senior Analyst Fitch Wire +44 20 3530 1250 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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