DBRS Ratings GmbH (DBRS Morningstar) upgraded the ratings of Banco BPM SpA (BBPM or the Bank), including the Long-Term Issuer Rating to BBB and the Short-Term Issuer Rating to R-2 (high). The Bank’s Deposit ratings were upgraded to BBB (high)/R-1 (low), 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 now Stable. Concurrently, the Senior Notes (ISIN XS1024830819) and Mandatory Pay Subordinated Debt (ISIN XS0597182665) ratings have been discontinued as they have been repaid. The Intrinsic Assessment (IA) is now BBB while the Support Assessment remains SA3. A full list of rating actions is included at the end of this press release.
KEY RATING CONSIDERATIONS
The upgrade reflects the success the Bank has had in gradually improving its profitability, as the active de-risking of the Bank in recent years has resulted in lower provisioning needs and therefore reduced pressure on the Bank’s income statement. In addition, BBPM’s commitment to cost reduction and the rationalisation of its franchise has translated into improved operating efficiency. In addition, increased business diversification, notably through a reinforced bancassurance business, has positively impacted fees and commissions, whilst higher interest rates should benefit net interest income. The upgrade also considers our view that these trends will continue, despite the potential impact of inflation on operating expenses. In upgrading the ratings, we also take into account that the significant reduction in non-performing exposures (NPEs) has resulted in asset quality metrics now being more in line with similarly rated domestic banks. We also believe this provides more room to absorb the potential asset quality deterioration that might arise in the current environment.
The ratings continue to reflect the Bank’s solid market position across the wealthy regions of Northern Italy, reinforced by the ongoing measures to streamline the operating structure and the development of digitalisation and fee-driven businesses, such as bancassurance. The ratings also continue to be underpinned by its solid funding and liquidity profile and the Group’s adequate capital position, driven by recurrent capital generation and regular access to the wholesale markets.
An upgrade of the ratings would require an material improvement in profitability metrics, together with continued progress in asset quality, whilst maintaining solid capital position.
The ratings would be downgraded should the Bank’s asset quality materially deteriorate. A sustained weakening of profitability metrics or in the capital base could also lead to a downgrade.
Franchise Combined Building Block (BB) Assessment: Good / Moderate
BBPM is the third largest Italian bank with EUR 208.7 billion in total assets at end-June 2022. The Group was formed from the merger of the former Banco Popolare and Banca Popolare di Milano on January 1, 2017. The BBPM franchise is underpinned by its solid market shares in Northern Italy, especially across the wealthy regions of Lombardy, Veneto and Piedmont. As part of its reorganisation and simplification process, BBPM has continued with the downsizing of its workforce and branch closures. In addition, we view as positive that BBPM has taken several steps to diversify its business mix, most notably reinforcing its strategic partnership in consumer finance, streamlining its footprint in leasing as well as placing a strong focus on the development of its bancassurance franchise. We consider this should help the Bank further improve revenues going forward.
Earnings Combined Building Block (BB) Assessment: Moderate / Weak
In DBRS Morningstar’s view, profitability remains somewhat modest but has improved through a combination of cost savings initiatives, lower cost of risk and improving core revenues. We expect the Bank’s NII to improve significantly, given its high sensitivity to interest rate increases. On top of this, we expect commissions to further benefit from the growing contribution of insurance to the Group’s business. The cost of risk should remain contained overall, as provisions in anticipation of further NPE reduction have already been booked and current default rates remain below expectations, despite the current environment. Finally, operating costs should further benefit from the ongoing reduction in staff numbers and the Bank’s commitment to cost containment, which should mitigate the impact of inflation and higher energy costs. BBPM reported net income of EUR 383.9 million in H1 2022, up 6.3% YoY from EUR 361.3 million in H1 2021. This was mainly driven by lower provisions. Total revenues were flat YoY, as higher core revenues offset lower results from financial operations. Operating expenses remained under control YoY due to the Bank’s ongoing focus on cost control, and this led the cost-income ratio to improve slightly to 54.5% in H1 2022 from 54.9% in H1 2021. In H1 2022, the cost of risk was 55 bps compared to 88 bps in H1 2021, a more normalised level and closer to the 48 bps target for 2024.
Risk Combined Building Block (BB) Assessment: Moderate / Weak
In recent years, the Bank has made significant progress in reducing its NPEs, mostly though disposals and securitisations, but also organic workouts. The Bank has put significant resources and effort into dealing with its NPEs, including the establishment of a dedicated NPE unit, as well as several capital management measures to strengthen provisioning levels and to cushion the impact from large NPE disposals. This has continued in H1 2022, with the Bank completing EUR 1.4 billion of its planned EUR 2.0 billion de-risking for 2022. This continued de-risking means that BBPM’s asset quality is now more in line with other Italian banks and provides a much better starting point to any potential deterioration the Bank might face in the current challenging environment. The total stock of NPEs decreased to EUR 5.5 billion at end-June 2022 from EUR 6.4 billion at end-2021 and the Gross NPE ratio decreased to 4.8% from 5.6% at end-2021. The total cash coverage stood at 47.8% at end-June 2022, fairly stable since end-2021. Coverage for bad loans was 61.5% (58.6% at end-2021) and coverage of Unlikely-to-Pay (UTP) loans was 40.3% (44.0% at end-2021). On top of this, BBPM also reported a high share of secured loans which accounted for 62% of total gross NPEs at end-June 2022.
Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate
DBRS Morningstar views Banco BPM’s funding profile as solid, supported by a large and stable deposit base which accounted for approximately 84.5% of the Bank’s funding at end-June 2022. In addition, DBRS Morningstar views as positive that the Bank has diversified its funding sources and reinforced its total loss absorption capacity through issuances on the wholesale markets. The Bank maintains a solid liquidity position, with total eligible assets of around EUR 53.8 billion as at end-June 2022, of which EUR 39.2 billion were from TLTRO III. In addition, the Bank reported LCR and NSFR ratios comfortably above requirements at end-June 2022.
Capitalisation Combined Building Block (BB) Assessment: Good / Moderate
DBRS Morningstar views BBPM’s capital position as solid, benefitting from the Bank’s capacity to generate earnings. In addition, the Bank’s capital ratios were further reinforced through issuances which helped diversify the capital base and build-up the total loss absorption capacity. Furthermore, thanks to the active de-risking process the Bank has undergone, we see BBPM’s capital as less pressured by the NPE stock, although we could expect some deterioration in coming quarters as a result of the current environment. We also expect BBPM’s capital ratios to improve when the Danish compromise is implemented, to take into account the insurance activities. The Bank maintains ample capital cushions over its SREP requirements of around 600 bps for common equity tier 1 (CET1) and Total Capital. As of H1 2022, the Bank’s reported fully loaded CET1 ratio was 12.8% and Total Capital ratio was 18.6%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/404008.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factors 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. (17 May 2022).
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. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.
The sources of information used for this rating include Morningstar Inc. and Company Documents, BBPM H1 2022 and 2021 Presentations, BBPM H1 2022 and 2021 Press Releases, BBPM H1 2022 Interim Report, BBPM 2021 Annual Report and BBPM 2021 Sustainability Report. 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/404009.
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: Ross Abercromby - Managing Director - Global FIG
Initial Rating Date: January 5, 2017
Last Rating Date: November 19, 2021
DBRS Ratings GmbH
Neue Mainzer Straße 75
Tel. +49 (69) 8088 3500
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.