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) -- Moody's Investors Services upgraded

Bank of Ireland's


bank financial strength by half a notch on Wednesday and reiterated a stable outlook for the company, citing the bank's improved capital levels .

Moody's raised its bank financial strength rating on the Bank of Ireland to D+ from D, which equates to long-term debt ratings of Baa3 and Ba2, respectively, it says. Moody's also affirmed its stable outlook for the bank's financial strength and its A1 (stable)/Prime-1 bank deposit and senior debt ratings, it says.

Bank of Ireland along with

Allied Irish Bank


are the two largest banks in Ireland. Similar to the U.S., Ireland's economy took a major dive as its property markets soured, taking several big Irish banks down with it.

Bank of Ireland and Allied Irish Bank have large government-owned stakes in their banks, while Irish regulators decided on Wednesday to split the state-owned

Anglo Irish Bank

into good bank/bad bank entities.

"Throughout this year there has been a substantial improvement in the creditworthiness of Bank of Ireland as a result of a number of factors," says Ross Abercromby, Moody's senior analyst for Bank of Ireland, in a note Wednesday.

Factors include the bank's ability to raise equity capital, the transfer of two tranches of loans to Ireland's resolution vehicle, the National Asset Management Agency (NAMA), at an average discount of 35% -- lower than other Irish banks -- and the approval of Bank of Ireland's restructuring plan by the European Commission, he notes.

Abercromby believes that Bank of Ireland's remaining assets to be acquired by the bad bank will have a similar discount.

"This -- together with the impairment of the remaining assets -- is sufficiently covered in our base scenario by the successful capital increase," the analyst says. However, the bank is still vulnerable to a worst case stress scenario and reflected in Moody's D+ financial strength rating.

Moody's also noted that early indications suggest the impairment charges on assets that are not transferred to the bad bank may have peaked. However, Moody's still believes that profitability at Bank of Ireland will remain pressured from elevated impairments on non-NAMA assets through 2012.

"The pressure is likely to come from the large residential mortgage book in Ireland as unemployment remains high, and from the business banking sector in Ireland that is likely to remain challenged as a result of the substantial fall in economic activity," the note says.

Moody's downgraded its outlook for ICS Building Society - a mortgage subsidiary of Bank of Ireland -- to negative in the report, but upgraded its financial strength ratings to reflect how highly integrated it is with its parent company.

As part of Bank of Ireland's negotiations with the European Commission, ICS Building Society needs to be sold. Bank of Ireland has a multiyear period in which to do so, Moody's says. However, any sale "is likely to be to a lower rated domestic entity given the small scale of ICS Building Society," Moody's says.

Moody's placed Bank of Ireland's and ICS Building Society's financial strength ratings on review in March. On July 21, Moody's downgraded the government guaranteed long-term debt of Bank of Ireland to Aa2 (stable outlook) from Aa1 (negative outlook).

--Written by Laurie Kulikowski in New York.

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Laurie Kulikowski


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