DBRS Ratings GmbH (DBRS Morningstar) assigned first-time public ratings to Cassa Centrale Banca - Credito Cooperativo Italiano S.p.A. (Cassa Centrale Banca or CCB or the Bank), including a Long-Term Issuer Rating of “BBB (low)” and a Short-Term Issuer Rating of “R-2 (middle)”. The Bank’s Long-Term Deposit Rating is “BBB”, 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 all ratings is Stable. The Bank’s IA is BBB (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
Cassa Centrale Banca – Credito Cooperativo Italiano S.p.A. (Cassa Centrale Banca or CCB or the Bank) is the central entity of Gruppo Bancario Cooperativo Cassa Centrale Banca Credito Cooperativo Italiano (Cassa Centrale Group or GBC or the Group), the second largest cooperative banking group in Italy.
The Bank’s “BBB (low)” IA reflects its primary role as the central institution of the second largest cooperative banking group in Italy, as well as its adequate funding, liquidity and capitalisation. We believe the influence of Cassa Centrale Banca has strengthened within GBC, since the establishment of the new Group in 2019 under the reform of the Italian cooperative banking sector, providing potential for synergies and improved market access. Also, the Group’s asset quality has improved in recent years, and we see GBC’s high non-performing loan (NPL) coverage level as a strength relative to peers.
Nonetheless, our ratings also consider the relatively modest profitability of the Group, which is constrained by low revenue diversification, moderate operating efficiency and high credit costs. Whilst we expect the cost of risk to weigh less on GBC’s profitability in the short-to-medium term given the improved risk profile and the better than expected recovery of the Italian economy from the COVID-19 global pandemic, in our view it will likely remain elevated due to the ECB’s recent Asset Quality Review (AQR) and also in line with further de-risking. In addition, our ratings take into account the moderate business diversification by geography and product, as well as the concentration risk arising from GBC’s sizeable exposure to Italian government bonds.
The Stable trend reflects that the Bank’s risks are broadly balanced at the “BBB (low)” rating level, considering the current operating environment. Our view takes into account the limited impact on the Group’s earnings and risk profile from the pandemic to date compared to initial expectations. In addition, we believe GBC should be able to manage any deterioration in asset quality, considering the moderate level of new NPL inflows experienced so far from expired moratoria, the significant reduction in outstanding loans subject to debt moratorium, and our expectation that the Group will continue to de-risk its balance sheet further while preserving a solid capital position. In our view, this should result in GBC’s profitability remaining relatively stable in the foreseeable future, under the assumption that risks arising from the pandemic remain under control.
An upgrade would require a significant improvement in profitability and further progress in the de-risking process while maintaining adequate capitalisation. Further diversification in the funding structure would be also viewed positively.
A material deterioration in asset quality, potentially affecting the already relatively modest profitability, would lead to a downgrade.
Franchise Combined Building Block (BB) Assessment: Moderate
Cassa Centrale Banca is the central institution of the second largest Italian cooperative banking group, which aggregated 71 cooperative banks (BCCs) as of October 2021, with combined assets of around EUR 91 billion at end-June 2021. GBC has a moderate footprint across Italy, rather concentrated in the North, especially the North-East where the Group originated, serving mostly households and SME clients. CCB has played a key role as the provider of funding and treasury services for the affiliated cooperative banks and rural banks, including access to ECB funds and to the payment system, and support for the BCCs’ customers with corporate finance, leasing, factoring and bancassurance products. In our view, the cohesion agreement and the guarantee scheme resulting from the establishment of the new Group in 2019 under the reform of the cooperative banking sector in Italy, have strengthened coordination and control within the Group, as well as underpinned its solvency and financial stability. Given the new and rather complex structure of the Group, we expect GBC to take further measures to enhance integration and consolidation.
Earnings Combined Building Block (BB) Assessment: Moderate / Weak
We see GBC's profitability as constrained by the low interest rate environment, low contribution from fee-driven income, as well as moderate operating efficiency and elevated credit costs. In H1 2021, the Group reported net attributable income of EUR 307 million, significantly up from EUR 117 million in H1 2020, mainly on higher revenues and lower loan loss provisions (LLPs), partly offset by increased operating expenses. Total revenues were up 15% YoY in H1 2021, largely driven by higher contribution to net interest income from the securities portfolio and uptake of TLTRO 3 sources, as well as sizeable non-recurring gains from the sale of Italian government bonds. The contribution of net fees to the Group’s revenue base remained moderate at around 26% of total revenues in H1 2021. The cost-to-income ratio reduced to 64% from 68.1% in H1 2020, as calculated by DBRS Morningstar, driven by growth in revenues. LLPs were down 29% YoY in H1 2021, implying an annualised cost of risk of around 50 bps, significantly down from 140 bps reported in FY 2020, when the Group incorporated the expected deterioration in asset quality due to COVID-19. We expect the cost of risk to increase in FY 2021 from the level reported in H1 2021, reflecting seasonality, the impact of the Asset Quality Review (AQR) concluded in July 2021 and our view that GBC will continue to de-risk its balance sheet. However, the cost of risk should remain below the level reported in 2020, considering the better than expected asset quality dynamics resulting from the pandemic.
Risk Combined Building Block (BB) Assessment: Moderate
The Group’s risk profile has improved in recent years, supported by NPL securitisations and disposals, and better quality new lending. GBC reported a stock of gross NPLs of around EUR 3.3 billion as of end-June 2021, corresponding to a gross NPL ratio of 6.9% (2.4% net of provisions), down from 9.6% at end-2019. Most of the Group’s loan book is concentrated in households and SMEs, with limited exposure to large corporates. We expect GBC to make further progress in reducing its stock of legacy NPLs, although we would expect some deterioration in asset quality due to the pandemic. The deterioration, however, could be less pronounced than previously anticipated, considering the manageable level of new NPL inflow experienced so far, the significant reduction in debt moratorium to around 9% of gross customer loans at end-June 2021 from nearly 30% one year earlier, and the better than expected recovery of the Italian economy. In addition, we see the high NPL coverage of 66.5% at end-June 2021 as a strength for the Group relative to peers. Disbursed State-guaranteed loans resulting from the global pandemic reached around EUR 4.7 billion as of end-June 2021, equivalent to 10% of GBC's gross customer loans.
The Group’s securities portfolio represented around 40% of GBC’s balance sheet as of end-June 2021, and it was highly concentrated in Italian sovereign bonds. Nonetheless, market risk remained low, accounting for less than 1% of GBC’s Risk-Weighted Assets (RWAs) as of end-June 2021.
Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate
We view GBC’s funding profile as adequate, supported by the large, sticky and highly fragmented retail deposit base of the BCCs, and centralised access to the wholesale market via CCB. Deposits with retail and SME clients, up 19% as of end-June 2021 compared to end-2019, are the main source of funding for the Group, accounting for 70% of GBC’s total funding. As of end-June 2021, customer deposits more than covered the Group’s loan book, with a loan-to-deposit ratio of around 79%, as calculated by DBRS Morningstar. GBC's exposure to the ECB was up 9% compared to end-2020, driven by the uptake of TLTRO 3 sources, and accounted for 22% of total funding as of end-June 2021. The Group’s outstanding bonds entirely consisted of securities privately placed with retail customers and certificates of deposit, which represented only 5% of GBC's funding in total. We expect CCB to increase debt issuances in the foreseeable future, with the aim of fulfilling its MREL regulatory targets. LCR and NSFR were strong at around 273% and 142% respectively as of end-September 2021.
Capitalisation Combined Building Block (BB) Assessment: Good / Moderate
In our view, GBC's capital position is adequate, underpinned by the robust capital base and rather contained capital absorbing business model. However, the relatively modest internal capital generation as well as the lower than average flexibility to raise capital in the markets constrain the Group's capital accretion ability. As of end-June 2021, GBC reported its phased-in CET1 and Total Capital ratios both at around 20.9%, or around 20% when considered on a fully loaded basis. Capital ratios improved since end-2019, mainly driven by the ongoing de-risking and the disbursement of State-guaranteed loans. As a result, at end-June 2021 GBC held solid buffers of 1,263 bps and 819 bps respectively over its SREP minimum requirements for CET1 and Total Capital ratios, excluding the ECB's temporary flexibility regime in place until end-2022. The Group’s solid capitalisation was also evident in the ECB’s Comprehensive Assessment concluded in July 2021, where GBC reported a fully loaded CET1 ratio of 17.14% in the baseline scenario and 10.59% in the adverse scenario, both well above the minimum requirements respectively set at 8% and 5.5%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/392052.
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 Morningstar Inc. and Company Documents, Cassa Centrale Banca H1 2021 Report, Cassa Centrale Banca 2017-2020 Annual Reports, Cassa Centrale Banca 9M 2021 Pillar 3 Report, Cassa Centrale Banca H1 2021 Pillar 3 Report, Cassa Centrale Banca Press Release dated February 3, 2022, Cassa Centrale Banca Press Release dated December 23, 2021, and Cassa Centrale Banca 2020 Non-Financial Statement. 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/392054.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Andrea Costanzo, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: February 8, 2022
Last Rating Date: Not applicable as there is no last rating date.
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