A 62% rise in the deficit of the Bank of Ireland’s defined benefit funds, partly due to the outcome of the Brexit vote, is credit negative for the bank, warned Moody’s Investors Service.
In a credit outlook note on Monday, Moody’s analysts cited a larger pension fund deficit, which hit €1.2 billion ($1.3 billion) as of June 30, up from €740 million as of Dec. 31, as “credit negative for the BOI because it will likely exceed the capital generated through earnings during the first half of 2016.” Moody’s said this negatively affects the bank’s regulatory capital metrics.
The funds had a total of €6.8 billion in assets as of Dec. 31, said its latest annual report.
The Bank of Ireland announced the increased deficit July 14, and said in a statement on its website that the outcome of the EU referendum in the U.K. had impacted foreign-exchange rates and interest rates. This includes AA corporate bond yields, which are used to discount the pension funds’ liabilities. This resulted in a deficit increase of about €500 million on an accounting basis.
Moody’s said the increased deficit “has led to significant volatility in the bank’s capital in recent quarters, despite its overall upward trend.”
The ratings agency warned that any increased deficit would have a negative effect on the bank’s capital, “particularly because the bank’s profitability will face challenges over the next 18 months as a result of the bank’s U.K. business operating in a weakening economic environment.”
Jack Lejk contributed to this story.