DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Istituto per il Credito Sportivo (ICS or the Bank), including the Long-Term Issuer Rating of BBB and the Short-Term Issuer Rating of R-2 (high). At the same time, DBRS Morningstar confirmed the Bank’s Long-Term Deposit Rating at BBB (high), one notch above the Long-Term Issuer Rating, 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 Support Assessment is SA1. A full list of rating actions is included at the end of this press release.
KEY RATING CONSIDERATIONS
ICS’s ratings reflect a Support Assessment of SA1, which implies the expectation of predictable support from its main shareholder, 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 Stable 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), Stable Trend” - https://www.dbrsmorningstar.com/research/396155/dbrs-morningstar-confirms-republic-of-italy-at-bbb-high-stable-trend).
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 Stable 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. In addition, any indication of a weakening of the commitment from the Italian government and/or a change of control in the Bank’s ownership structure could also lead to a downgrade.
ICS is a small public bank and independently managed public body, with total assets of around EUR 3.4 billion and 209 employees at end-2021, responsible for ensuring sustainable support to sport and culture in Italy. ICS is a leader in the niche sector of financing Italian sport facilities. 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. Since 2014, ICS 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). This ownership structure is the result of material corporate governance issues which forced ICS under extraordinary administration for over six years until February 2018. 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.
In our view, the Bank’s moderate earnings power reflects modest revenue diversification, low interest margins and high cost of risk. ICS reported a net profit of around EUR 15 million in 2021, up 37% Year-on-Year (YoY), largely driven by lower loan loss provisions (LLPs). Total revenues were down 3% YoY in 2021, mainly due to lower gains on the sale of Italian government bonds on which the Bank has significantly relied in recent years. ICS continued to demonstrate good cost discipline in 2021 with a cost-to-income ratio of 53.2%, although this was up from the 39% average reported in the 2011-2020 period, mostly due to higher headcount and lower revenues. The Bank’s cost of risk was 44 bps in 2021, down from 157 bps reported in 2020 which included adjustments for COVID, and below the 78 bps reported as the average annualised cost of risk in 2011-2020. This reflects an improvement in ICS’s risk profile and a lower than expected deterioration in asset quality due to COVID-19.
DBRS Morningstar considers ICS’s risk profile to be still relatively weak although it has significantly improved due to loan workouts, improved lending standards and disposals. The Bank’s gross and net non-performing exposure (NPE) ratios were 9.7% and 4.4% respectively as of end-2021, down from 10.3% and 4.9% at end-2020, but still comparing unfavourably with the Italian average. NPEs mainly arise from ICS’s exposure to the private sector, however this 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. Deterioration in asset quality due to the pandemic has remained manageable to date thanks to the unprecedented support measures and good recovery in the Italian economy, however we note that gross Stage 2 loans (loans whose credit risk has increased since origination) represented around 30% of total gross loans at end-2021, up from 5% at end-2019, reflecting the deterioration in the macroeconomic environment. Potential deterioration in asset quality might materialise in the medium-term given the inflationary pressures and higher energy prices connected with Russia’s invasion of Ukraine. Despite the significant reduction in recent years, single-name concentration in ICS’s loan book does remain relatively high.
DBRS Morningstar views ICS’s funding and liquidity profile as sound, benefiting from the significant, albeit reduced, recourse to its shareholders’ funds, and access to multilateral institutions which have ensured growth in funding, as well as low cost funding. The Bank’s exposure to the ECB reduced significantly in 2021 (-37% YoY) with most of the Pandemic Emergency Longer-Term Refinancing Operations (PELTRO) redeemed and replaced by bank repo transactions with the aim to increase funding diversification, optimise funding costs and to better manage the securities portfolio. In addition, ICS continued to expand and further diversify its bank financing through two new credit lines with domestic counterparties. The Bank’s Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) stood above regulatory minimum requirements as of end-2021.
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 to 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 (CET1) capital only, meaning that the CET1, Tier 1 and Total Capital ratios were all 79.5% as of end-2021, down from 87.3% one year earlier. The reduction was due to an increase in Risk-Weighted Assets (RWAs) from higher loan volumes, and a negative impact in the valuation reserve connected with the sovereign debt securities portfolio. 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.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on the Republic of Italy are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of Italy are discussed separately at https://www.dbrsmorningstar.com/issuers/17689.
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 (23 June 2022) https://www.dbrsmorningstar.com/research/398692/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 Company Documents, ICS Reports 2011-2021, ICS Pillar 3 2021, 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.
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/399730
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: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: August 2, 2021
Last Rating Date: November 5, 2021
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