DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banca Monte dei Paschi di Siena SpA (BMPS or the Bank) including the Long-Term Issuer Ratings of B (high) and the Short-Term Issuer Ratings of R-4. DBRS Morningstar also confirmed the Long-Term and Short-Term Critical Obligations Ratings (COR) at BBB (low) / R-2 (middle). The COR reflects DBRS Morningstar’s expectation that, in the event of a resolution of the Bank, certain liabilities (such as payment and collection services, obligations under a covered bond program, payment and collection services, etc.) have a greater probability of avoiding being bailed-in and are likely to be included in a going-concern entity. The Bank’s Deposit ratings were confirmed at BB (low)/R-4, 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 all ratings remains Stable. DBRS Morningstar has also maintained the Intrinsic Assessment at B (high) 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 confirmation of the ratings takes into account certain improvements in BMPS’s fundamentals in recent quarters. However, the Long-Term ratings of B (high) continue to reflect the weakness of the franchise, profitability and capital levels.
Whilst BMPS returned to profits in 2021, we continue to view the profitability as weak whilst earnings remain volatile and pressured by the current environment. As a result, cost efficiency remains weaker than peers, despite the Bank’s cost discipline and restructuring. However, we also acknowledge that profitability is less pressured than in recent years, thanks to the substantial de-risking and the resulting lower provisioning needs.
Despite progress in the restructuring plan on the cost and asset quality sides, we consider BMPS’s franchise has suffered, notably from legacy conduct issues, which led to higher litigation risks linked to prior capital increases. In our view, this has contributed to preventing a successful exit from the Italian government ownership, as initially agreed following BMPS’s precautionary recapitalisation. Negotiations with UniCredit for a potential acquisition were unsuccessful in late 2021, leaving the Ministry of Economy and Finance (MEF), the Bank’s main owner, without an M&A solution. In the absence of such a solution, the Bank announced they would go ahead with a planned capital injection of EUR 2.5 billion, which we view as key to keep the Bank afloat and help deliver on the targets of the future business plan, expected to be presented on June 23, 2022.
The ratings also take into account the Bank’s vulnerable capital position. In 2020, de-risking, the transfer of NPEs , the impact from COVID-19 and higher provisions for litigation risks have eroded BMPS capital ratios. Despite capital management actions and the Bank's return to profits in 2021, the expected increase of risk-weighted assets (RWAs) and IFRS 9 phased-in could lead to a capital shortfall on the Tier 1 ratio by end-Q1 2023. However, we expect BMPS to benefit from the planned EUR 2.5 billion capital injection included in its capital plan presented to the ECB in Q1 2022.
The ratings also incorporate the Bank’s stabilised funding and liquidity profile, although BMPS did not access the wholesale capital markets in 2021 and Q1 2022 as issuances remains expensive for the Bank pending the capital increase.
Finally, the ratings are underpinned by the much cleaner asset quality profile since the large transfer of non-performing exposures (NPE) to the Italian state-owned bad loan manager Asset Management Co. SpA (AMCO) in Q4 2020. We now view asset quality metrics as more in line with domestic peers. Nevertheless, we believe uncertainty 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 BMPS has no direct exposure to Russia and Ukraine
An upgrade would require the Bank to restore adequate capital buffers through the planned recapitalisation, continue to reduce the pending litigation issues and demonstrate recurrent profitability whilst maintaining current asset quality metrics.
A downgrade would occur should the recapitalisation fail or should the bank capital ratios fall below regulatory requirements.
Franchise Combined Building Block (BB) Assessment: Moderate/Weak
BMPS is Italy’s fourth largest bank by total assets and has a significant market share in its home region of Tuscany. The Bank is currently undertaking a restructuring plan for 2017-2021, following the approval of the Italian State’s precautionary recapitalisation of the Bank in 2017. As part of this plan, BMPS has continued to improve efficiency with the closure of branches and headcount reduction. In addition, the Bank has substantially reduced NPEs, including the EUR 7 billion of NPEs to AMCO in 2020 which, combined with organic reduction, has resulted in a cleaner balance-sheet. The transfer was essential for the Italian Ministry of Finance (MEF), which is BMPS’s main shareholder with a 64% stake, to find an exit solution. However, we also recognise that the Bank’s franchise has suffered reputational damage from legacy conduct issues, in particular litigation risk linked to prior capital increases. After failed negotiations between the Italian government and UniCredit to privatise BMPS, the Bank will proceed with a capital increase at market conditions, with a pro-rata participation by the MEF. We understand this will be announced on June 23, 2022 with the release of BMPS’s new strategic plan. We also note BMPS has had some changes in its senior management team with Luigi Lovaglio becoming the new CEO on February 7, 2022 and Andrea Maffezzoni the new CFO on June 14, 2022.
Earnings Combined Building Block (BB) Assessment: Very Weak
Whilst BMPS returned to profits in 2021, we view its profitability as weak. In 2021, the Group reported net attributable income of EUR 309.5 million compared to a EUR 1.7 billion loss a year ago. Results were supported by lower provisions as well as resilient core revenues and lower operating expenses. In Q1 2022, the Group reported net attributable income of EUR 9.7 million, down from EUR 119.3 million in Q1 2021. This was a result of higher provisions and lower revenue generation, mainly on lower profits from the sale of securities despite higher core revenues. Operating costs remained under control, down 0.9% YoY, thanks to the Bank’s strong cost discipline. However, the cost to income ratio remains higher than peers, due to revenue pressure. Loan loss provisions were up 50.5% YoY, as a result of higher NPL coverage. As a result, the cost of risk was 56 bps compared to 36 bps a year ago.
Risk Combined Building Block (BB) Assessment: Weak/Very Weak
The Group’s asset quality improved significantly following the transfer of over EUR 7 billion of NPEs to AMCO in Q4 2020. Since then, the Group’s gross and net NPL ratios have remained fairly stable, standing at 4.8% and 2.3% at end-March 2022.
Funding and Liquidity Combined Building Block (BB) Assessment: Moderate
Whilst BMPS’s funding position has stabilised in recent years, the bank has not accessed the wholesale markets as issuances remain expensive. This is however mitigated by the planned EUR 2.5 billion capital injection which will allow the bank to meet capital requirements such as MREL. BMPS is largely funded by deposits from retail and corporate clients.. At end-March 2022, the Bank maintained an acceptable liquidity position with an unencumbered counterbalancing capacity of EUR 25.0 billion, corresponding to circa 19% of the Bank’s total assets. The LCR and NSFR were reported at above 186% and 136% respectively at end-March 2022.
Capitalisation Combined Building Block (BB) Assessment: Weak/Very Weak
Whilst BMPS’s capital position improved following the prior precautionary recapitalisation and burden-sharing with the holders of its subordinated bonds, we continue to view the Bank’s current capital buffers as very weak. De-risking, the transfer of NPEs to AMCO, the impact from COVID-19 and provisions for litigation risks have contributed to lower capital ratios. Incorporating the planned capital reduction due to the IFRS 9 phasing-in and taking into account the impact expected higher risk-weighted assets (RWAs) subsequent to changes in the credit risk measurement models, BMPS estimates that a shortfall of around EUR 500 million could materialise in Tier 1 capital at end-March 2023 without any remedial action. Nevertheless, we note this shortfall has reduced from EUR 1.5 billion initially anticipated in November 2020, thanks to the Bank returning to profits and executing several capital management actions. To resolve this, BMPS will proceed to a capital strengthening estimated at EUR 2.5 billion which the Bank included in its capital plan presented to the ECB in Q1 2022, at market conditions and including a pro-rata participation of the MEF. At end-March 2022, BMPS reported a fully loaded Common Equity Tier 1 (CET 1) ratio of 10.8%, down 20 bps from end-2021, mainly resulting from FVTOCI reserves and a slight RWA increase. The phased-in CET 1 ratio of 11.6% at end Q1-2022 continues to provide the Group with an adequate buffer over the Overall Capital Requirement (OCR) for CET1 (phased-in) ratio of 8.8%. The fully loaded and phased-in Total capital ratios stood at 14.5% and 15.3% at end-March 2022, which provides a weak buffer over the minimum OCR for total capital of 13.5%. A shortfall could potentially materialise for the Tier 1 ratio which stood at 11.6% (phased-in) at end-March 2022 compared to a SREP of 10.81%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/398399.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Governance (G) Factors
The Governance factor does affect the ratings or trend assigned to BMPS. In particular, we view the Business Ethics and the Corporate/Transaction Governance ESG subfactors as significant to the credit rating. The Bank has suffered a reputational impact from legacy conduct issues, in particular litigation risk linked to former capital increases. In addition, BMPS is 64% owned by the Italian State because of a precautionary recapitalisation which is subject to an EU restructuring plan. As a result, these risks are incorporated in the Bank’s Franchise 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/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, BMPS Q1 2022 and 2021 Results Press Release, BMPS Q1 2022 and 2021 Results Presentation, BMPS Q1 2022 and 2021 Report, BMPS 2021 Non-Financial Statement. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/398398.
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: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: January 18, 2013
Last Rating Date: June 16, 2021
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