DBRS Ratings GmbH (DBRS Morningstar) assigned first-time public ratings to BPER Banca S.p.A. (BPER or the Bank), including a Long-Term Issuer Rating of BBB and a Short-Term Issuer Rating of R-2 (high). The Bank’s Long-Term Deposits Rating is BBB (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 Bank’s Long Term Critical Obligations Rating is A (low), two notches above the IA. The trend on all ratings is Stable. The Bank’s IA is BBB and the Support Assessment is SA3. At the same time, DBRS Morningstar upgraded the ratings of Banca Carige S.p.A. (Carige), including the Long-Term Issuer Rating to BBB from B (low) and the Short-Term Issuer Rating to R-2 (high) from R-5. The trend on these ratings is Stable. The Support Assessment for Carige was changed to SA1 from SA3 to reflect its ownership by BPER and the IA of Carige was withdrawn. Carige’s ratings were placed Under Review with Positive Implications on February 22, 2022, and today’s rating action concludes the review. A full list of rating actions is included at the end of this press release.
KEY RATING CONSIDERATIONS
The “BBB” IA reflects BPER’s well established franchise in Italy which we expect to benefit from its improved market position as well as higher diversification by product and geography following the recent acquisitions of the Intesa Sanpaolo (ISP)-UBI Banca (UBI) branch network perimeter, and Banca Carige (Carige). The ratings also consider BPER’s progress in reducing its stock of non-performing exposures (NPEs) in recent years which we view as likely to continue, mainly driven by the expected disposal of the bad loan internal management unit along with a sizeable NPE portfolio which should be finalised by early 2023. This should allow BPER to maintain a significantly better risk profile compared to the past, in our view, even when accounting for the inclusion of Carige and for some additional asset quality deterioration due to COVID-19 and high inflation connected with Russia’s invasion of Ukraine.
The ratings also incorporate the Bank’s adequate capital, and funding and liquidity position. The acquisition of Carige should lead to a negligible impact on BPER’s current capitalisation level. Nonetheless, the ratings still take into account the Bank’s moderate profitability which is primarily constrained by modest margins, relatively weak operating efficiency and high cost of risk. Carige is still under restructuring but its reported net losses have been gradually reducing. We expect BPER’s profitability to improve over the medium/long-term, driven by an improved market position in a context of progressively higher interest rates, as well as synergies from recent acquisitions and a reduction in credit costs on the back of the improvement in risk profile. However, the indirect implications from Russia’s invasion of Ukraine are likely to pressure the expected improvement in the Bank’s profitability.
The Stable trend reflects that the Bank’s risks are broadly balanced at the BBB rating level, considering the challenging operating environment. The Stable trend also takes into consideration BPER’s new strategic initiatives, including the disposal and deconsolidation of non-core assets which should enable the Bank to fund future business growth and digitalisation.
The Critical Obligations Rating (COR) addresses the risk of default of particular obligations/exposures at certain banks that have a higher probability of being excluded from bail-in and remaining in a continuing bank in the event of the resolution of a troubled bank than other senior unsecured obligations. The A (low) Long-Term COR reflects the Bank’s higher importance in the Italian banking environment, considering it ranks as the fourth largest bank in Italy by total assets and its domestic market share should be equal or above 5% pro-forma for the inclusion of Carige, based on customer loans and customer deposits. The Bank’s LT COR is one notch above DBRS Morningstar’s BBB (high) LT Issuer Rating on the Republic of Italy.
As a result of the acquisition of approximately 80% of Carige’s share capital by BPER, DBRS Morningstar considers Carige as a core banking subsidiary of BPER. This is a key element underpinning the upgrade of Carige’s ratings, including a Long-Term Issuer Rating of BBB, up from B (low). As a result, the ratings of Carige are equalised to those of BPER, in line with the typical notching applied to domestic bank subsidiaries of banking organisations. The SA1 support assessment for Carige considers DBRS Morningstar’s expectation that BPER has the willingness and ability to support Carige, if required. Furthermore, DBRS Morningstar expects Carige to be merged into BPER Group by end-2022. Execution risks should be relatively manageable in our view, considering the track record BPER has demonstrated with the recent integration of Intesa Sanpaolo (ISP)-UBI Banca (UBI) branch network perimeter.
As next steps of the integration process, BPER will complete the acquisition of the remaining 20% of Carige’s shares, pursuant to law, and will proceed with the delisting of Carige’s shares. In addition, to ensure compliance with the Antitrust requests, DBRS Morningstar expects BPER to complete the disposal of 48 branches by Q1 2023. The merger of Carige and IT integration are targeted for completion by end-2022. The trend on Carige’s ratings is Stable, in line with the trend on BPER’s ratings.
An upgrade of BPER’s Long-Term Issuer Rating would require a material improvement in the Bank’s underlying profitability and continued progress in asset quality while maintaining sound capital buffers.
A downgrade of BPER’s ratings would likely be driven by a significant deterioration in the Bank’s asset quality or capitalisation. A failure in the management of execution risks stemming from recent acquisitions could lead to a downgrade.
Given the SA1 designation, Carige’s ratings will generally move in tandem with BPER’s ratings. An upgrade would require an upgrade of the parent’s ratings.
Similarly, a downgrade of Carige’s ratings would result from a downgrade of BPER’s ratings or should Carige become a non-core subsidiary for BPER Group.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
BPER is the fourth largest banking group in Italy with around EUR 160 billion in total assets pro-forma for the recently acquired Banca Carige. The Bank mainly provides traditional banking services to individuals and corporates, mostly SMEs, as well as corporate and investment banking, private banking, asset & wealth management, insurance, leasing and factoring. BPER completed several meaningful transactions in recent years which fell within its strategy to strengthen its market position and regulatory capital, accelerate de-risking, streamline its structure, and achieve value creation through revenue, cost and funding synergies. The Bank has material market shares in its home region of Emilia Romagna, as well as in Southern Italy and Sardinia, and in addition its market position has improved throughout Italy, especially in Lombardy, Liguria and Tuscany on the back of the acquisition of ISP-UBI branch network, and Carige. The Bank currently owns 80% of Carige’s share capital and is in the process of acquiring the remaining 20%, with the aim to merge Carige into BPER by end-2022. BPER’s main shareholder, Unipol Group, currently holds around 20% of the Bank’s share capital, and plays a critical role for its bancassurance business model in addition to being a supportive shareholder.
Earnings Combined Building Block (BB) Assessment: Moderate
BPER’s earnings profile reflects modest margins but a well-diversified revenue mix, as well as relatively weak operating efficiency and still high credit costs. The Bank reported net attributable profit of around EUR 113 million in Q1 2022, down from EUR 400 million in Q1 2021, which however included sizeable net positive one-offs, mostly driven by badwill from the acquisition of UBI assets, partly offset by goodwill impairments, integration costs, and loan loss provisions (LLPs) due to accelerated de-risking. Excluding these one-offs, pre-tax profits would have gone up 50% YoY in Q1 2022. Core revenues (net interest income and net fees) were up 22% YoY in Q1 2022, mainly driven by the contribution from the ISP-UBI going concern perimeter as well as good recovery of business activities from the pandemic, partly offset by lower contribution from TLTRO 3 and securities portfolio, and compressed customer margins. Operating efficiency remained relatively weak with a cost-to-income ratio of 70.1% in Q1 2022, although down from 79.5% in Q1 2021 thanks to growth in revenues. The Bank’s annualised cost of risk was 49 bps in Q1 2022, or 57 bps including provisions booked against direct exposures to Russia, down from 106 bps in FY 2021 which was, however, affected by COVID-19 overlays and accelerated de-risking.
Risk Combined Building Block (BB) Assessment: Moderate/Weak
Since end-2017, BPER’s stock of gross NPEs has reduced markedly by 62% to around EUR 4 billion as of end-March 2022, mainly driven by disposals, internal workout and higher recoveries. As a result, the Bank’s gross and net NPE ratios fell to 4.9% and 2% respectively at end-Q1 2022, from 19.9% and 11.3% at end-2017. These levels, however, continue to remain high compared to European peers. We note that BPER targets a gross NPE ratio of 3.6% by end-2025, with NPE disposals and management actions expected to more than offset around EUR 6 billion of new NPE inflows estimated to materialise due to the deteriorated macro environment. Deterioration in asset quality from the expiry of around EUR 15 billion of debt moratoriums granted due to COVID-19 has been manageable to date, as BPER’s average annualised default rate remained low at around 1% over 2020 to Q1 2022. As of end-March 2022, just EUR 46 million of debt moratoriums were still active, accounting for 0.1% of total net customer loans, whereas State-guaranteed loans reached EUR 7.5 billion, up 23% YoY and accounting for 9.5% of total net customer loans.
As of end-March 2022, the Bank had very small direct gross credit exposure to Russia, Belarus and Ukraine, for a total outstanding amount of EUR 58 million, including off-balance sheet exposures. However, we note that Stage 2 loans (loans whose credit risk has increased since origination) represented 11.1% of net performing loans as of end-March 2022, up from 10.2% at end-2021 due to a recalibration of internal rating models which encompass worsened macroeconomic assumptions due to Russia’s invasion of Ukraine. The potential risk for BPER from around EUR 500 million of Carige’s legal risks connected with the latter’s recapitalisation in 2019 remains limited in our view, as the court rejected all the claims against Carige in its first judgement.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
We consider BPER’s funding profile as solid, with its retail customer base accounting for 94% of total direct funding as of end-March 2022. The Bank’s funding structure largely consists of customer deposits which represented around 73% of total funding as of end-Q1 2022. ECB funding, fully consisting of TLTRO 3 funds, is BPER’s second main source of funding, accounting for 15% of total funding. The Bank also operates in the repo market with banks and institutional counterparties with a proportion of 5% of total funding. We view BPER’s access to capital markets as satisfactory with around EUR 4.6 billion bonds outstanding as of end-March 2022, equivalent to 4% of total funding, mostly wholesale senior, covered and subordinated bonds. In order to replace the gradual phase-out of TLTRO 3 funds and with the aim to fulfil MREL regulatory requirements, we note that BPER targets issuances of around EUR 6 billion in 2022-2025, of which EUR 0.6 billion of Tier 2 subordinated bonds were already issued in Q1 2022. The Bank maintains a sound liquidity profile with a liquidity buffer of EUR 29 billion as of end-March 2022, including EUR 9 billion of unencumbered eligible assets and EUR 20 billion of deposits with the ECB.
Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
In our view, BPER maintains an adequate capital position despite the Risk-Weighted Asset (RWA) inflation from recent acquisitions and moderate internal capital generation. As of end-March 2022, the Bank reported a phased-in CET1 ratio of 14.1% and a phased-in Total Capital ratio of 17%, down from 14.5% and 17.2% respectively at end-2021, mostly due to the IFRS 9 phase out. The current level of capital ratios provides solid buffers of 581 bps and 419 bps respectively for CET1 and Total Capital ratios over the SREP minimum requirements, excluding the ECB’s flexibility regime on capitalisation which will end in 2023, and incorporating a Pillar 2 Requirement (P2R) of 2.3%, up by 30 bps compared to 2021. The sensitivity of BPER’s capital to the rise in the Italian sovereign spread connected with Russia’s invasion of Ukraine and exacerbated by the recent Italian government crisis, remains limited as 93% of the Bank’s Italian government debt securities were reclassified to amortised cost (AC) as of end-March 2022.
The Bank’s future retained earnings should be able to counteract the negative impact on BPER’s capitalisation due to business growth, investments to support the new strategy and regulatory headwinds. In addition, Carige should have a negligible capital impact on the Bank’s capitalisation mainly thanks to a capital contribution of EUR 530 million injected into Carige by the FITD prior to the acquisition by BPER, the conversion of around EUR 400 million of Carige’s Deferred Tax Assets (DTAs) into tax credits, and the extension of the Bank’s AIRB models to Carige.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/400488
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Governance (G) Factors
The G factor(s) have changed from the prior credit rating disclosure. Prior to the acquisition of Carige by BPER we considered the “Business Ethics” and “Corporate Governance” subfactors as significant to the ratings of Carige. We deem these subfactors to be no longer significant nor relevant to Carige’s ratings as it should benefit from becoming part of a larger and stronger banking group endowed with effective corporate governance and adequate internal controls. In light of the acquisition by BPER, a new Board of Directors (BoD) was appointed for Carige on 15 June 2022, however the Court of Genoa has suspended the execution of the resolutions appointing the BoD and waiving the liability actions against two former directors adopted on that day upon the appeal by the shareholder Malacalza Investimenti S.r.l.. The Court is expected to confirm, modify or revoke its decree on 9 August 2022.
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
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.
DBRS Morningstar notes that this Press Release was amended on July 28, 2022 to incorporate the solicited rating status.
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 Morningstar Inc. and Company Documents, BPER Q1 2022 Results Press Release, BPER Q1 2022 Results Presentation, BPER Q1 2022 Report, BPER 2022-2025 Business Plan Press Release, BPER 2022-2025 Business Plan Presentation, BPER 2017-2021 Annual Reports, BPER 2021 Non-Financial Statement, Carige Q1 2022 Results Press Release, and Carige 2017-2021 Annual Reports. 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.
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/400486 and https://www.dbrsmorningstar.com/research/400483
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: July 28, 2022
Last Rating Date: Not applicable as there is no last rating date
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