Moody’s yesterday (Tuesday) upgraded by one notch the senior debt and deposit ratings of Bank of Ireland, from Ba3 to Ba1 and Ba2 to Baa3, respectively, citing improvements in profitability, capital and funding as well as a favourable operating environment, with NPLs noted as a constraining factor.

The rating agency took the rating actions after raising the bank’s baseline credit assessment (BCA) from ba2 to b1. It is now aligned with the standalone bank financial strength rating (BFSR), which was upgraded from E+ to D, noted Moody’s.

“The upgrade reflects our expectations that Bank of Ireland will continue to improve its profitability and strengthen its capital position on the back of the lower funding cost and the declining cost of credit supported by the favourable operating environment in Ireland and the UK, its two main operating markets,” said Carlos Suarez Duarte, senior analyst at Moody’s. “Bank of Ireland’s liquidity and funding metrics also continue to improve driven by a shrinking funding gap, its renewed access to debt markets and a significant reduction in its use of funding from monetary authorities.”

Moody’s said the results of the European Central Bank’s Comprehensive Assessment showed Bank of Ireland to have adequate provisioning levels and that it would remain sufficiently capitalised to withstand an adverse economic shock under current transitional capital rules.

“However,” added Suarez Duarte, “further positive rating pressure is only likely to materialise once Bank of Ireland reduces its still high non-performing loan ratio.”

The outlook on the bank’s deposit rating remains negative, noted Moody’s, reflecting the rating agency’s expectations of a lower probability of systemic support for creditors being forthcoming in the event of need following the recent adoption of the Bank Recovery & Resolution Directive (BRRD) and Single Resolution Mechanism (SRM) regulation in the EU. The outlook on all other Bank of Ireland ratings was changed from negative to stable.