DBRS Ratings GmbH (DBRS Morningstar) assigned first-time public ratings to Istituto per il Credito Sportivo (ICS or the Bank), a public bank controlled by the Italian government. The ratings include a “BBB” Long-Term Issuer Rating and a “R-2 (high)” Short-Term Issuer Rating. The Bank’s Long-Term and Short-Term Deposits ratings are BBB (high)/R-1 (low) respectively, one notch above the Issuer ratings, reflecting the legal framework in place in Italy which has full depositor preference in bank insolvency and resolution proceedings. The trend on all ratings is Negative. A full list of rating actions is included at the end of this press release.
KEY RATING CONSIDERATIONS
DBRS Morningstar has assigned a Support Assessment of SA1 to ICS, which implies the expectation of predictable support from its main shareholders, the Italian government. DBRS Morningstar currently rates the Republic of Italy’s Long-Term Foreign and Local Currency – Issuer Ratings at BBB (high) with a Negative trend (for more details on the rationale for the Sovereign rating action, please refer to the press release "DBRS Morningstar Confirms Republic of Italy at BBB (high), Trend Remains Negative" - https://www.dbrsmorningstar.com/research/377815/dbrs-morningstar-confirms-republic-of-italy-at-bbb-high-trend-remains-negative). The Long-Term Issuer Rating of ICS is one notch below the Long-Term Issuer Rating of Italy, reflecting that despite the expectation of predictable support, there is not a government guarantee or explicit commitment from the government to maintain the capitalisation of the Bank. Nevertheless, DBRS Morningstar expects support to ICS from the Italian State to be forthcoming in case of need, as a result of the Bank’s ownership and its strategic public mission. The Negative trend mirrors the trend on the Republic of Italy’s ratings.
An upgrade of the Republic of Italy’s ratings would likely lead to an upgrade of ICS’s ratings. An upgrade of ICS’s Long-Term Issuer rating could also be driven by an explicit guarantee and commitment of support to ICS from the Italian government.
A downgrade of ICS’s ratings could result from a downgrade of Italy’s Sovereign rating. Any indication of weakening of commitment from the Italian government and/or a change of control in the Bank’s ownership structure might also lead to a downgrade.
Established in 1957, ICS is a small public bank and independently managed public body, with total assets of around EUR 3 billion and 187 employees at end-2020, responsible for ensuring sustainable support to sport and culture in Italy. With over 34,000 infrastructure items financed, corresponding to around 75% of Italian sport facilities since the Bank’s establishment, ICS is a leader in this niche sector. DBRS Morningstar expects support to ICS from the Italian State to be forthcoming in case of need, as a result of the Bank’s ownership and its strategic public mission which we deem to be the key pillars underpinning ICS’s ratings.
Owing to material corporate governance issues affecting the ability to ensure sound and prudent management of the Bank, ICS was placed under extraordinary administration from January 2012 to February 2018. This led, among other things, to the issuance of new bylaws for ICS in 2014, resulting in a significant change in its shareholders structure. Since then, the Bank has been ultimately 89.4% owned by the Italian State, with 80.4% direct ownership through the Italian Ministry of Economy and Finance (MEF) and around 9% indirect ownership through Sport e Salute, and Cassa Depositi e Prestiti (CDP). As the main reference shareholder, the Italian State is represented on the board of directors, with members appointed by the government, other public shareholders or by the MEF.
DBRS Morningstar views the Bank’s earnings power as moderate, primarily constrained by modest revenue diversification, low interest margins and high cost of risk resulting from relatively weak asset quality and COVID-19. ICS reported a net profit of EUR 10.9 million in 2020, down 38% Year-on-Year (YoY) and down 33% compared to the annualised net profit reported in 2011-2019. This was largely driven by higher loan loss provisions (LLPs) in anticipation of a deterioration in the Bank’s loan portfolio due to the global pandemic, as well as higher operating expenses. Total revenues increased by around 14% YoY in 2020, largely supported by gains on the sale of Italian government bonds on which the Bank has showed significant reliance over recent years. ICS has demonstrated good cost discipline, with an average cost-to-income ratio of around 39% in 2011-2020, or 48% when calculated on core revenues. The Bank’s cost of risk stood at 157 bps in 2020, up from 69 bps in 2019 and up from 59 bps reported as the average annualised cost of risk over 2011-2019.
DBRS Morningstar considers ICS’s risk profile to be still relatively weak although significantly improved on the back of loan workouts, improved lending standards and disposals. Notwithstanding the effort demonstrated over recent years, single-name concentration remains notable in our view. The Bank reported gross and net Non-Performing Exposure (NPE) ratios of 10.3% and 4.9% respectively at end-2020, still comparing unfavourably with the Italian average. Non-performing loans mainly arise from ICS’s exposure to the private sector which, however, accounts for a lower proportion of the Bank’s lending book than that of the public sector. In addition, we note that most of ICS’s loan portfolio benefits from public and bank guarantees.
DBRS Morningstar understands the unprecedented support measures announced by the Italian government, including the implementation of debt moratoriums and State-guaranteed loans, have been a key factor in limiting the impact on asset quality for ICS to date. We believe that the currently challenging scenario will result in a rise in NPEs once the moratoria have expired. However, we expect the Bank to progress with the workout of its legacy doubtful exposures to offset the expected deterioration in its loan portfolio. In addition, we expect the Bank to continue to benefit from good quality loan origination, reflecting greater diversification towards factoring and leasing, as well as the continued supply of State-guaranteed loans.
DBRS Morningstar views ICS’s funding and liquidity profile as sound, benefiting from significant, albeit reduced, recourse to its shareholders’ funds as well as access to multilateral institutions, including Council of European Development Bank (CEB) and European Investment Bank (EIB). These have ensured stable as well as low cost funding. However, ECB remains ICS’s main source of funding at around EUR 774 million, accounting for 37% of its funding mix at end-2020. The Bank has a solid liquidity position, as reflected in the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) well above regulatory minimum requirements.
ICS maintains a robust capital position, in light of its high capital base and moderate capital absorbing business model, driven by the concentration of its assets on public clients, which receive low risk weights, as well as the use of public guarantees. However, the Bank’s internal capital generation is relatively modest. ICS’s regulatory own funds consist of Common Equity Tier 1 Capital only, meaning that CET1, Tier 1 and Total Capital ratios were all 87.3% as of end-2020, down from 92.5% one year earlier. The current level of capital ratios provides sizeable cushions over the Bank’s SREP requirements of 8.98% for CET1 ratio, and 13.65% for Total Capital ratio, including a Pillar 2 Guidance (P2G) of 50 bps.
ICS´s ESG drivers mirror those of the Republic of Italy given the SA1 Support Assessment and the links between ICS and the Italian State. For more details on the rationale of ESG Factors on the Republic of Italy, refer to the press release ("DBRS Morningstar Confirms Republic of Italy at BBB (high), Trend Remains Negative" - https://www.dbrsmorningstar.com/research/377815/dbrs-morningstar-confirms-republic-of-italy-at-bbb-high-trend-remains-negative).
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 ICS Reports 2011-2020, ICS Pillar 3 2020, and ICS Bylaws (24 January 2014). 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/382540.
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: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: August 2, 2021
Last Rating Date: Not applicable
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