DBRS Ratings GmbH (DBRS Morningstar) assigned new ratings to Banca Carige S.p.A. (Carige or the Bank), including a B (low) Long-Term Issuer Rating and a R-5 Short-Term Issuer Rating. The Bank’s Long-Term Deposits Rating is B, one notch above the Intrinsic Assessment (IA), reflecting the legal framework in place in Italy which has full depositor preference in bank insolvency and resolution proceedings. The Bank’s Long Term Critical Obligations Rating is B (high), two notches above the IA. The trend on all ratings is Stable. The Bank’s IA is B (low) and the Support Assessment is SA3. A full list of rating actions is included at the end of this press release.
KEY RATING CONSIDERATIONS
The B (low) IA reflects the significant deterioration which occurred in the Bank’s franchise in Italy, as a result of past mismanagement issues. Due to these issues, the Bank has been in a restructuring phase for several years. The ratings also consider Carige’s very poor profitability and its modest capital cushion over the minimum regulatory requirement for the Total Capital ratio, despite the recent recapitalisation process. In our view, capitalisation could potentially further deteriorate in the coming months due to our negative expectations on internal capital generation and asset quality. As a result, in order to progress with its restructuring plan, the Bank is likely to need to raise further capital, potentially up to EUR 400 million by end-2022, if the ECB withdraws its current more flexible approach to capital buffers at the end of 2022.
The ratings also incorporate the significant progress the Bank has made to reduce its stock of non-performing loans (NPLs) in recent years. However, uncertainty around the impact of the COVID-19 pandemic on asset quality remains relatively high. We expect NPL inflows to increase throughout 2021 and 2022 as support measures are removed, considering the Bank’s significant exposure to SMEs which we view as more vulnerable in the current environment. The funding and liquidity profile has stabilised recently although we still see it as potentially exposed to deterioration should the relaunch of the Bank’s franchise not be successful, or if a return to profitability is delayed, implying a further erosion of capital buffers.
The Stable trend reflects that the Bank’s risks are broadly balanced at the B (low) rating level, considering the challenging environment. The Stable trend also takes into consideration the new initiatives to support its business relaunch. These mainly consist of a reorganisation of the commercial supply chain, a new wealth management approach and IT investments. In our view, this may pave the way for a return to profitability over the medium term.
The Critical Obligations Rating (COR) addresses the risk of default of particular obligations/exposures at certain banks that have a higher probability of being excluded from bail-in and remaining in a continuing bank in the event of the resolution of a troubled bank than other senior unsecured obligations. The B (high) Long-Term COR reflects the Bank’s importance in the Italian banking environment, as demonstrated by the intervention of Italy’s Interbank Deposit Protection Fund.
An upgrade of the ratings is unlikely over the near term, given the challenging economic outlook. An upgrade of the ratings would require a return to sustained earnings generation as well as a strengthening of capital buffers. Investments to relaunch the Bank's franchise would also be credit positive.
A downgrade would occur if the Bank’s profitability and capital were to deteriorate more than expected, potentially from the impact of the pandemic. A downgrade would also occur from a notable asset quality deterioration and/or any material deterioration in its funding and liquidity profile.
Franchise Combined Building Block (BB) Assessment: Weak / Very Weak
Carige is a small Italian retail and commercial bank with total assets of around EUR 21 billion as of end-March 2021, with significant market shares in its home region of Liguria. Carige is currently undertaking a restructuring plan over the 2019-2023 period, following past mismanagement issues and failures in corporate governance. These had resulted in need to issue around EUR 320 million of Tier 2 subordinated bonds in November 2018 to restore compliance with minimum capital requirements, and in the subsequent 13-month temporary administration by the ECB, from January 2019. Following the completion of a new EUR 900 million rescue plan, which saw the participation of Italy's Interbank Deposit Protection Fund ("Fondo Interbancario di Tutela dei Depositi" or "FITD") and Cassa Centrale Banca - Credito Cooperativo Italiano ("Cassa Centrale" or "CCB"), and a disposal of EUR 2.8 billion (gross value) of NPLs to Italy’s State-owned bad loan manager AMCO, the ECB’s temporary administration ended in January 2020, with FITD becoming Carige’s main shareholder with a stake of around 80% and CCB became its second largest shareholder with an 8.34% shareholding.
As part of the ongoing restructuring process, Carige is seeking to improve its revenue generation and cost efficiency, while continuing to de-risk its balance sheet. However, the COVID-19 pandemic has negatively impacted the process and the Bank now expects to return to positive net profitability in 2023, a one year delay on the original target. We believe that Carige’s franchise has significantly deteriorated in recent years, and the Bank is still in the process of recovering from the significant reputational and financial damage resulting from the recent past. In addition, in our view the execution risk around the Bank’s restructuring plan remains relatively high in the current challenging environment.
Earnings Combined Building Block (BB) Assessment: Very Weak
Carige has been loss making since 2013. The Bank is struggling to restore its profitability which generally reflects low revenue generation, poor efficiency levels and a slightly higher cost of risk compared to the Italian average due to the de-risking, and the impact of COVID-19. The Bank reported a net loss of EUR 39.7 million in Q1 2021, compared to a net loss of EUR 55.1 million in the two-month period of restored ordinary administration (February-March 2020). The results for the quarter showed a gradual recovery in core revenue generation (net interest income and net fees), which continued the positive trend observed since Q3 2020, supported by fee-driven income, despite the pressure from low interest rates and the de-risking. Efficiency levels remain very poor with a cost-to-income ratio of 111% in Q1 2021, as calculated by DBRS Morningstar. Loan loss provisions (LLPs) were EUR 23 million in Q1 2021; this included around EUR 8 million mainly due to the new Definition of Default (DoD) and in anticipation of future asset quality deterioration due to the pandemic. As a result, the annualised cost of risk was 75bps in Q1 2021 (as calculated by DBRS Morningstar), an improvement on the 82 bps reported in 2020 and down from an average of 226 bps in the 2016-2020 period.
Risk Combined Building Block (BB) Assessment: Weak / Very Weak
Since NPLs peaked at end-2016, the total stock of gross NPLs has decreased by over 90% to around EUR 613 million, as of end-March 2021. This has been a result of disposals and securitisations, and progressively lower NPL inflows from performing loans on the back of tighter lending standards. As a result, in Q1 2021, Carige reported gross and net NPL ratios of 4.9% and 2.5% respectively, down from 34.5% and 22.6% respectively at end-2016. Whilst comparing well in the domestic market, the ratios remain higher than the European average. Since the onset of the pandemic, the Bank has granted EUR 2.1 billion of debt moratorium, of which EUR 1.2 billion were still outstanding as of end-April 2021, accounting for 10% of total net customer loans. The Bank has also disbursed around EUR 2.4 billion of State-guaranteed loans, equivalent to around 20% of total net customer loans, roughly 2.5 times its traditional market share, and 25% of the total loans backed by the State guarantee granted in its home region of Liguria to date. For the time being, the combination of debt moratoriums and State-guaranteed loans have helped to prevent a build-up of NPLs. Nonetheless, we expect new NPL inflows to increase throughout 2021 and 2022 as support measures are removed, in light of the Bank’s significant exposure to SMEs which we view as more vulnerable in the current environment. DBRS Morningstar also notes that Carige has disclosed that it could face around EUR 500 million in potential legal risks resulting from the latest recapitalisation in 2019.
Funding and Liquidity Combined Building Block (BB) Assessment: Moderate / Weak
Whilst continuing to show limited diversification, Carige’s funding position has stabilised following the latest recapitalisation. Since then, the trend in direct deposits from retail and corporate customers has been positive, with customer deposits increasing in the period from end-January 2020 to end-March 2021 by 9%, to EUR 12.9 billion, accounting for 68% of the Bank’s funding. The ECB’s TLTRO 3 is the second main source of funding for the Bank, at around 18% of its funding at end-Q1 2021. Access to wholesale markets has been limited recently and primarily reliant on covered bonds, securitisations and government guaranteed bonds resulting from the Italian State liquidity support granted during the temporary administration. In our view, Carige’s access to capital markets remains highly dependent on investor confidence around the Bank's future strategy and business relaunch, as well as on the trade-off with funding costs, considering its current very weak earnings power. The Bank’s liquidity position was sound as of end-March 2021, with a counterbalancing capacity of EUR 2.9 billion and the LCR at 198%. Nonetheless, given the recent challenges, DBRS Morningstar will continue to closely monitor liquidity and funding trends.
Capitalisation Combined Building Block (BB) Assessment: Very Weak
Carige’s capitalisation remains poor, despite the recent recapitalisation and de-risking, which led to the minimum regulatory requirements being reduced by 50 bps. As of end-March 2021, Carige reported a phased-in CET1 ratio of 11.5% and a Total Capital ratio of 13.7%, down from 12% and 13.9% respectively at end-January 2020. The deterioration in capital ratios was mainly driven by the capital depletion resulting from the continued negative net profitability which more than offset the significant reduction in risk weighted assets (RWAs) as a result of the NPL disposals. As of end-March 2021, this implied a satisfactory capital cushion of 295 bps over the Bank’s minimum SREP requirement of 8.55% for the CET1 ratio, but a weak buffer of only 45 bps over the 13.25% minimum requirement for the Total Capital ratio, including the Capital Conservation Buffer (CCB). We expect capital cushions to reduce given the expected pressure on internal capital generation and RWA evolution which will likely start to incorporate asset quality deterioration due to the impact of COVID-19. This could result in the Bank's Total Capital ratio falling below the SREP minimum requirement, although we note that the ECB currently allows banks to operate below the Pillar 2 Guidance and their CCB levels until at least the end of 2022, considering the current challenging environment. As a result, in order to progress with its restructuring plan on a stand-alone basis, the Bank would likely need to raise further capital, potentially up to EUR 400 million by end-2022, if the ECB withdraws its current more flexible approach to capital buffers at the end of 2022.
Further detail on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/382469
We view the Business Ethics and the Corporate Governance ESG subfactors as significant to the credit rating. These are included in the Governance category. The Bank has suffered financial and reputational damage from legacy conduct issues, including criminal allegations against Carige’s former executives for criminal association, fraud and money laundering. In addition, failures in corporate governance forced the Bank to be under the ECB’s temporary administration from January 2019 to January 2020. Whilst the Bank has appointed a new Board of Directors, including the CEO, since the end of the temporary administration, we believe that Carige is still in the process of regaining investor and consumer confidence. As a result, these risks are incorporated in the Bank’s Franchise, Earnings Power and Risk Profile grid grades.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021)
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The sources of information used for this rating include Company Documents, Carige Press Release dated 22 July 2021, Carige Q1 2021 Results Press Release, Carige Highlights FY2020 Presentation, Carige FY2020 Results Presentation, Carige “Results achieved and outlook update (February 2021)” Presentation, Carige Annual Reports 2016-2020, Carige 2020 Non-Financial Statement, and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
This rating concerns a newly rated issuer. This is the first DBRS Morningstar rating on this issuer.
DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/382468
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Andrea Costanzo, Assistant Vice President - Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: July 30, 2021
Last Rating Date: Not applicable
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