The US credit rating agency, Standard & Poor's, has warned that it may downgrade its ratings on Allied Irish Banks (AIB).

It has placed its long-term ratings on the bank and its long and short-term ratings on AIB's related companies on creditwatch with negative implications. Its short-term ratings on AIB and Allied Irish Banks NA Inc are unchanged.

The creditwatch placement follows AIB's announcement that it signed an in-principle agreement with Keppel TatLee Bank (KTL) which gives AIB the right to take up a 24.9 per cent stake in KTL.

Noting that AIB can choose not to exercise the warrants, Standard & Poor's said "the exercise of the warrants would give it a significant stake in a smaller bank, in a testing market. The size of the potential investment is significant compared with AIB's capital base".

KTL is the fifth largest bank in Singapore with total assets of $12 billion (€11.6 billion). It has a credit rating of triple B, lower than AIB's A plus. The largest shareholders in KTL are Temasek Holdings and Keppel Corporation, which are Singapore government-linked groups.

Standard & Poor's believes that "a large-scale acquisition in more distant markets, such as southeast Asia, would increase AIB's risk profile and could strain capital" but the credit agency noted AIB's longstanding policy to maintain its tier 1 ratio over 6 per cent and it was well above this, at 7.5 per cent, at the end of last year.

AIB has structured the deal to minimise the risk to the bank but Standard & Poor's said the transaction indicates that AIB is actively envisaging building its presence in southeast Asia.

AIB has a Singaporean banking licence and has been active in the market since 1984 but "this transaction marks something of a strategic departure". The newly merged Irish Life & Permanent has received an improved credit rating from Standard & Poor's. It has assigned an A long-term debt rating for the group, awarding it the same credit rating in this regard as Bank of Ireland and AIB. The new rating should improve its ability to offer more competitive mortgage products.

Despite the higher rating, S&P predicts some moderate deterioration in group profits. S&P has also lowered its long-term ratings on Irish Life Assurance and its US subsidiaries, Inter-State Assurance and First Variable Life Insurance, from AA- to A-.

The agency said the ratings are based on the group's leading positions in the life, pensions, residential mortgage market in the Republic and its growing diversification.

S&P cautions that IL&P's results should deteriorate modestly in the medium term, mainly due to lower investment earnings. The US subsidiaries continue to fall short of performance targets set by its parent, and S&P expects no significant earnings improvement in the short to medium term.

It suggests improved management of its banking operations should help to soften the impact of any economic slowdown on asset quality.