Outlook is negative
London, 16 February 2009 – Moody’s Investors Service has today downgraded the long-term bank deposit rating and the senior debt rating of Irish Nationwide Building Society (INBS) to Baa3 from Baa1. The society’s subordinated debt has been downgraded to Ba1. The bank financial strength rating (BFSR) was lowered to D- (mapping to a baseline credit assessment - “BCA” - of Ba3) from C- (BCA of Baa2). The outlook is negative . The short term debt and deposit ratings were downgraded to Prime-3 from Prime-2. This concludes the review on the bank’s ratings initiated on 4 September 2008. The backed-Aaa rated senior debt, maturing prior to September 29 2010, and the backed short-term issuer rating of Prime-1, covered by the Irish government guarantee, are unaffected by this action.
**The downgrade of the BFSR to D-, with a negative outlook, reflects Moody’s expectation that impairments in the society’s commercial property loan book will continue to increase, as well as the poor asset quality within the residential mortgage book. Given our loss expectations for the loan portfolio, the society’s capital levels have the potential to be eroded to levels which are consistent with a low D range bank financial strength rating. **The negative outlook reflects that the rapid deterioration in land and property values in Ireland and the UK that have eroded the high loan-to-value ratios on the commercial property and development loan book and the deteriorating economic conditions in both Ireland and the UK may lead to further pressure on asset quality beyond our current expectations.
Additionally given the poor performance of the commercial property markets and the likelihood that the demand for commercial property lending is likely to remain low in the medium term, Moody’s believes that the current business model of the society will need to change. Currently around 80% of the loan book is commercial property based and only 20% is residential lending. We expect the society to aim to increase the proportion of residential lending, however as the society’s position in the Irish residential mortgage market has also weakened in recent years, as the concentration on commercial property increased, Moody’s considers that this will be challenging. The society’s strategic response to these challenges includes reducing the size of its balance sheet, and although this will reduce the funding requirement it will have a negative impact on the ability of the society to generate pre-provision earnings. Furthermore we have previously noted the high concentration risk within the portfolio, and although we expect the society to work down some of its largest exposures, the concentration risk within the portfolio remains high. As the economic environment deteriorates this could potentially lead to substantially higher provisioning requirements.
The Baa3 long-term bank deposit and senior debt ratings of INBS incorporate three notches of uplift from the Ba3 BCA. This takes into account the support from the Irish government evidenced by the inclusion of Irish Nationwide in the guarantee scheme, and our expectation that further support would be forthcoming if needed.
Due to the downgrade of INBS’s senior debt rating to Baa3, Moody’s also downgrades INBS’s Mortgage Backed Promissory Notes to Baa1. The ratings of the Mortgage Backed Promissory Notes benefit from a two notch uplift from the issuer’s senior debt rating. Please refer to the “Framework Agreement in Respect of the issue of Mortgage Backed Promissory Notes” on moodys.com .
The last rating action on INBS was on September 4, 2008 when the ratings were downgraded to Baa1/C- and placed on review for further possible downgrade.
Irish Nationwide Building Society, headquartered in Dublin, Ireland, had total assets of EUR16.1 billion at year-end 2007.
so as a bank its at the second lowest level of the possible rating “modest intrinsic financial strength, potentially requiring some outside support at times” and if it were not for the blanket guarantee its bonds would be not Baa3 ("moderate credit risk. They are considered medium-grade and as such “protective elements may be lacking or may be characteristically unreliable”) but would be below investment grade at Ba2 or Ba3 ("Obligations rated Ba are judged to have “questionable credit quality”) .
