Credit ratings agency Moody's has upgraded the long-term bank deposit and debt ratings of Bank Of Ireland and AIB.
As part of the same action, Moody's upgraded the baseline credit assessments (BCAs) of AIB and BOI.
The news comes one week after the Government announced that it is to float a quarter of its share in the bailed-out AIB.
"The rating upgrades reflect a range of positive factors, including further reduction in non-performing loans, improved capital ratios and achievement of stable core profitability," Irakli Pipia, vice president-senior credit officer at Moody’s, said.
However Pipia went on to issue a warning about AIB’s higher levels of problem loans, which it said meant that the ratings agency “continues to justify a difference in the base line credit assessment of AIB relative to BOI".
The ratings agency maintained a positive outlook on BOI's long-term senior unsecured debt and deposit ratings. While the agency revised the outlook on AIB's long-term senior unsecured debt and deposit ratings to stable from positive.
Moody’s said that the upgrade of BOI's BCA reflected improvements in the bank’s asset quality, improving trend in capital ratios, stable core profitability and net interest margin, and a good funding profile, reflected in an improved loan-to-deposit ratio of 108pc as at end-2016 down, from 112pc a year earlier.
However the agency noted that the current BCA takes into account the remaining sizeable stock of non-performing loans. The bank's problem loans as a percentage of its capital and loan loss reserves at 60pc as at end-2016 still compares unfavorably to similarly rated peers, the agency said.
With AIB, the agency said that the upgrade of AIB's long-term debt and deposit ratings was driven by the revision of the bank's BCA to ba1 from ba2.
Moodys also said that the upgrade of AIB's BCA to ba1 reflected a number of trends including the on-going improvement in asset quality, improvement in capital levels, the bank stabilising its core profitability with improved earnings quality and increasing net interest margin, and a funding profile exhibiting lower reliance on market funds than in previous periods and a comfortable liquidity position.
The agency note that the BCA also incorporates the bank's higher problem loans as a percentage of its capital and loan loss reserves, which were 69pc as at end-2016. In Moody's view these features constrain further upside potential of the bank's BCA over the outlook horizon.