DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banca Sella Holding S.p.A. (Sella or the Group) and its main operating subsidiary Banca Sella S.p.A. (the Bank), including the Long-Term Issuer Rating of BBB (low) and the R-2 (middle) Short-Term Issuer Rating. The Bank’s Deposit ratings were confirmed at BBB/R-2 (high), one notch above the IA, reflecting the legal framework in place in Italy which has full depositor preference in bank insolvency and resolution proceedings. The trend on the Group’s long-term and short-term ratings was changed to Stable from Negative. DBRS Morningstar has also maintained the Intrinsic Assessment (IA) for Banca Sella S.p.A. at BBB (low) and the Support Assessment at SA3 for Banca Sella Holding S.p.A. and SA1 for Banca Sella S.p.A.. The IA on Banca Sella Holding S.p.A. has been withdrawn and the BBB (low) IA remains in place at the operating bank. The SA1 reflects Banca Sella S.p.A.’s strong integration with the parent and its 78.63% ownership by Banca Sella Holding S.p.A.. DBRS Morningstar rates Banca Sella S.p.A. and Banca Sella Holding S.p.A. at the same level as they are both regulated banking entities. A full list of rating actions is included at the end of this press release.
KEY RATING CONSIDERATIONS
In reverting the trend to Stable from Negative, we have taken into account that our concerns have reduced regarding the potential impact of COVID-19. In particular, we note the Group’s improved profitability driven by capital gains from the deconsolidation of Hype, improved operating efficiency, and lower cost of risk compared to 2020. This also reflects our view that revenues will continue to benefit over the medium term from digital banking, a strong contribution from non-interest income and stabilisation of the cost base, as laid out in its strategic plan. Nevertheless, the Group continues to report relatively weak efficiency ratios relative to peers.
In addition, the change in trend incorporates the continued improvement in asset quality with the Non-Performing Exposure (NPE) ratio now closer to domestic and European peers. Whilst the Russian invasion of the Ukraine brings additional uncertainty, we view the improvement in asset quality gives Sella more flexibility, especially given the absence of asset quality deterioration from the pandemic.
Finally, we also take into account that capital ratios have improved in 2021 and that we expect capital ratios to improve further thanks to the implementation of the AIRB models in 2022. However, we note that capital ratios remain at the low end of the peer group and, as a non-listed bank, the Group has more limited capital flexibility.
The confirmation of the ratings continues to reflect Sella’s relatively small but solid and diversified franchise. Ratings are also underpinned by Sella’s stable funding and liquidity position.
An upgrade of the Long-Term ratings would require improvements in efficiency levels and in capitalisation levels whilst maintaining current asset quality metrics.
A downgrade would arise from a substantial deterioration in capital, a material increase in NPLs or significant negative impact on profitability.
Franchise Combined Building Block (BB) Assessment: Moderate/Weak
The ratings incorporate Sella’s stable market position in retail and commercial banking in its home region of Piedmont, as well as its relatively diversified business profile. The Group benefits from growing private banking, asset management, and open banking, as well as a small but solid market position in the payment system business. In addition, the Bank is active in digital banking, through its growing mobile application, “Hype”, in which Sella remains a shareholder despite the recent sale of a 50% stake in the company.
Earnings Combined Building Block (BB) Assessment: Moderate/Weak
In 2021, the Group reported net attributable income of EUR 108.3 million, up more than threefold year-on-year (YoY) from EUR 29.6 million. Results in 2021 incorporated capital gains stemming from the deconsolidation of Hype, following the setup of the joint-venture with Illimity. Excluding this, net attributable income would have been up 73% YoY. Results were supported by lower provisions compared to 2020, which incorporated COVID-19 related provisions, and higher core revenues despite higher operating expenses. The cost to income ratio stood at 75.8%, compared to 79.7% a year earlier. We expect operating efficiency to continue improving in coming quarters.
Risk Combined Building Block (BB) Assessment: Moderate
The Group’s asset quality has continued to improve in 2021 with the Group’s gross NPE ratio reaching 4.2%, down from 5.7% as of end-2020 and 6.8% at end-2019 and we see this level as now comparing favourably to domestic banks and more in line with the average for European banks. The net NPL ratio was 2.2% at end-2021, compared to 2.9% at end-2020 and improved from 3.6% at end-2019. The unprecedented measures put in place by the domestic and European authorities have delayed the formation of NPLs following the COVID-19 pandemic. Therefore, we believe that some uncertainty still remains regarding the full effect of the COVID-19 pandemic on asset quality. In addition, the macroeconomic outlook has been made less clear by Russia’s invasion of Ukraine, although Sella has no direct exposure to Russia and Ukraine. Nevertheless, we understand Sella will proceed with additional bad loan disposals, which should give the Group more flexibility to absorb a potential new influx of NPEs.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
DBRS Morningstar views Sella’s funding profile as good, supported by its large deposit retail franchise and limited reliance on wholesale funds. The Group’s wholesale funding is mainly composed of ECB funding, in the form of TLTRO 3 funds, and asset backed securities. At end-2021, Sella's liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) remained well above regulatory requirements at 199% and 134% respectively.
Capitalisation Combined Building Block (BB) Assessment: Moderate/Weak
Whilst Sella's capitalisation remains modest, capital ratios have improved in 2021 thanks to internal capital generation, bad loan disposals and the partial sale of Hype. We expect capital ratios to improve further thanks to the implementation of the AIRB models in 2022. Sella reported at end-2021 a phased-in CET1 ratio of 12.3%, stable from end-2020. The phased-in Total Capital ratio was 14.2%, stable from end-2020. This provides the Group with adequate cushions over the minimum requirements set by the Bank of Italy for 2022 for CET1 of 7.28% and 11.0% for Total Capital
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/396483.
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 and Sella Q4 2021 Press Release. 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/396482.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Arnaud Journois, Vice President - European Financial Institutions
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: July 7, 2014
Last Rating Date: May 7, 2021
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