DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banco BPM SpA (BBPM or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). The Bank’s Deposit ratings were confirmed at BBB/R-2 (high), 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 trend on the Long-Term Issuer Rating is now Positive. DBRS Morningstar has also maintained the Intrinsic Assessment (IA) at BBB (low) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.
KEY RATING CONSIDERATIONS
The change of the trend to Positive reflects our view that the risks associated with the global coronavirus pandemic (COVID-19) and its implications for Italy’s operating environment have now reduced. BBPM’s track record throughout the pandemic has been strong and the Bank has been able to significantly improve its asset quality, putting it in a stronger position to deal with any potential asset quality deterioration when the support measures expire. In addition, the Positive trend incorporates BBPM’s ongoing commitment to reduce legacy non-performing exposures (NPEs), for which the Bank has announced additional disposals. DBRS Morningstar also takes into account the Group’s build-up of loss-absorbing capacity in recent years and overall improved capital position.
The confirmation of the ratings continues to reflect the Bank’s solid market position across the wealthy regions of Northern Italy, reinforced by the continued measures to streamline the operating structure. The ratings also continue to be underpinned by its solid funding and liquidity profile. However, the ratings also take into account the Bank’s modest profitability, despite the improving operating efficiency. This reflects the core revenue pressure driven by the persistent low interest rate environment, and the high cost of credit. Banco BPM has set goals to improve overall profitability in its 2021-2024 Strategic Plan, notably though digitalisation and development of fee-driven businesses, such as bancassurance, which should help the Bank better leverage on its franchise.
An upgrade of the ratings would require an improvement in profitability metrics whilst maintaining the current risk profile.
The ratings would be downgraded should the Bank’s profitability materially reduce. A significant weakening of the capital base could also lead to a downgrade.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Banco BPM is the third largest Italian bank with EUR 196.8 billion in total assets at end-September 2021. The Group was formed from the merger of the former Banco Popolare and Banca Popolare di Milano on January 1, 2017. The Banco BPM franchise is underpinned by solid market shares in Northern Italy, especially across the wealthy regions of Lombardy, Veneto and Piedmont. As part of its reorganization and simplification process, Banco BPM continued with the downsizing of its workforce and branch closures.
Earnings Combined Building Block (BB) Assessment: Moderate/Weak
Profitability remains modest, reflecting the ongoing core revenue pressure and the high cost of risk related to the challenging environment despite improving operating efficiency. In 9M 2020 Banco BPM reported net income of EUR 472.0 million, up 79.8% YoY. Net interest income (NII) improved 4% despite the low interest rate environment, driven by volume growth and TLTRO III. Fees and commissions continued to recover and were up 15.5% YoY. Operating expenses remained under control YoY due to the Bank’s ongoing focus on cost control, and this led to the cost-income improving to 55% in 9M 2021 from 59% in 9M 2020. Loan loss provisions (LLP) were down 15.9% in 9M 2021 YoY to EUR 673.2 million, absorbing 44% of Income before Provisions and Taxes (IBPT). Whilst this has reduced from last year, the cost of risk remains high as the Bank prepares for additional NPE disposals and tightening of Stage 2 criteria. In 9M 2021 the cost of risk was 83 bps (9M 2020: 98 bps),
Risk Combined Building Block (BB) Assessment: Moderate/Weak
In recent years, the Bank has made significant progress in reducing its NPEs, mostly though disposals and securitisations. In 9M 2021, the Bank proceeded with the disposal of around EUR 1.5 billion of Bad Loans, with the securitisation of around EUR 342 million using the Italian GACS scheme, in light of the likely formation of new NPEs due to the economic impact of COVID-19. In our view, the latter will likely appear with the end of the support provided by the moratoria schemes. On top of this, the Group has announced the expected disposal of an additional EUR 650 million portfolio, demonstrating the Bank’s ongoing commitment to de-risking. The total stock of NPEs decreased to EUR 6.6 billion at end-September 2021 from EUR 8.6 billion at end-2020 and the Gross NPE ratio decreased to 5.9% from 7.5% at end-2020, and it is expected to fall to 5.3% incorporating the planned disposals, more in line with the average for domestic peers. Nevertheless, at 47.4% at end-September 2021, the coverage ratio remains below that of domestic peers.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views Banco BPM’s funding profile as solid, supported by a large and stable deposit base which accounted for approximately 85% of the Bank’s funding at end-September 2021. In addition, DBRS Morningstar views as positive that the Bank has diversified its funding sources and reinforced its total loss absorption capacity through issuances on the wholesale markets. The Bank maintains a solid liquidity position, with total eligible assets of around EUR 61.4 billion as at end-September 2021, of which EUR 37.5 billion were from TLTRO III and EUR 12.3 billion were unencumbered eligible assets. In addition, the Bank reported LCR and NSFR ratios comfortably above requirements at end-September 2021.
Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
In 2021 the Bank’s capital ratios were further reinforced through issuances which helped diversify the capital base and build-up the total loss absorption capacity. The Bank maintains ample capital cushions over its SREP requirements of around 600 bps for common equity tier 1 (CET1) and Total Capital. As of 9M 2020, the Bank’s reported fully loaded CET1 ratio was 13.3% and Total Capital ratio was 17.9%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://www.dbrsmorningstar.com/research/388393.
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) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. 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
The sources of information used for this rating include Company Documents, BBPM 9M 2021 Presentation, BBPM 9M 2021 Press Release, BBPM 9M 2021 Financial Data, BBPM 2021-2024 Strategic Plan Presentation from November 5, 2021 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.
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/388395.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Ross Abercromby - Managing Director - Global FIG
Initial Rating Date: January 5, 2017
Last Rating Date: November 20, 2020
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