DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Iccrea Banca SpA (Iccrea or the Bank), including the Long-Term Issuer Rating of BB (high) and the Short-Term Issuer Rating of R-3. Concurrently, DBRS Morningstar confirmed the Bank’s Long-Term Deposit Rating at BBB (low), which is 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 has been changed to Positive from Stable. The Bank’s IA is maintained at BB (high) and the Support Assessment at SA3. See a full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The confirmation of the ratings and the trend change to Positive from Stable take into account Iccrea’s key role as the central entity of Gruppo Bancario Cooperativo Iccrea (GBCI or the Group), the largest Italian cooperative banking group, its strong retail funding and solid capital position, as well as the progress that the Group is making to reduce its large stock of legacy non-performing loans (NPLs) and simplify its structure. As a result, in DBRS Morningstar’s view, GBCI is in a stronger position to withstand an expected deterioration in the operating environment due to the ongoing high inflationary pressure, weaker economic growth, and higher interest rates.
At the same time, we continue to view GBCI’s underlying profitability as relatively modest considering the low contribution from fee income, modest operating efficiency and above-average credit costs. However, in our view, the higher interest rates coupled with further efficiency actions should support the Group's core earnings generation going forward. GBCI’s profitability in H2 2022 is also expected to benefit from the capital gain of over EUR 400 million resulting from the recent reorganisation of the Group’s payment operations. Furthermore, while the combination of high inflation and higher interest rates could pose risks to asset quality in the medium term, we expect the cost of risk to remain below the level experienced in recent years on the back of lower stock of legacy NPLs.
The Bank’s IA is positioned below the Intrinsic Assessment Range (IAR). This in part reflects the scorecard results and the net profitability level reported in H1 2022 which, in our view, was boosted by non-recurring gains from the securities portfolio and subdued credit costs.
An upgrade would require further improvements in asset quality and core profitability while preserving sound capital buffers.
Given the Positive trend, a downgrade is unlikely at this time. However, the trend could be revised to Stable in the event of a significant formation of new NPLs or if GBCI fails to improve profitability structurally.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Formed in March 2019, the Group is the largest cooperative network in Italy with 120 small cooperative banks (BCCs) and total combined assets of around EUR 176 billion at end-June 2022. The Group has an extensive domestic footprint with around 2,500 branches and 22,000 employees evenly distributed across Italy, serving over 3 million clients, mostly households and SMEs. Iccrea and the cooperative banks are tied by a cohesion agreement which creates a framework for more effective coordination and better controls within the Group as well as the potential for more consolidation and simplification of its complex structure. We note that the Group has continued to streamline its operational structure by reducing the number of BCCs and branches, while enhancing IT integration and strengthening its commercial distribution model.
Earnings Combined Building Block (BB) Assessment: Moderate/Weak
GBCI’s underlying profitability remains constrained by low margins, subdued contribution from fee income, as well as modest operating efficiency and above-average credit costs. However, the hike in interest rates coupled with further efficiency actions and lower loan loss provisions (LLPs) on the back of the improved risk profile should support the Group's profitability going forward. In H1 2022, GBCI reported net attributable income of EUR 676 million, up 69% year-on-year (YoY), and an annualised Return on Equity (ROE) of 12.4%, up from 7.5% in H1 2021. The increase was largely driven by a higher contribution to net interest income (NII) from the securities portfolio, mainly inflation-linked Italian government bonds, as well as lower funding costs and lower LLPs. The cost-to-income ratio was 62.6% in H1 2022, down from 65.7% in H1 2021, as calculated by DBRS Morningstar, thanks to the growth in revenues. In H1 2022, GBCI’s annualised cost of risk was 40 bps, down from 90 bps in H1 2021. However, we expect the cost of risk to increase from the level in H1 2022 due to increased risks to asset quality resulting from high inflation and higher interest rates. In addition, we expect H2 2022 results to benefit from the capital gain on the disposal of BCC pay.
Risk Combined Building Block (BB) Assessment Moderate/Weak
As part of its de-risking strategy, the Group has continued to reduce its stock of legacy NPLs, however its credit quality metrics still compare unfavourably by international standards. Credit quality has largely remained resilient during the pandemic, as loan moratoria and other government-support measures have shielded the Bank from a material asset quality deterioration. Most customers have resumed their debt payments post moratoria.
As of end-June 2022, GBCI reported EUR 5.6 billion in gross NPLs, down 33% YoY, corresponding to a gross NPL ratio of 5.9% (or 2.2% net of provisions). At the same time, the total NPL coverage strengthened to 64.1%, up from 57.4% one year earlier, also as a result of the outcome of the ECB’s Comprehensive Assessment. In addition, we note that a high share of GBCI’s NPLs are backed by real estate collateral (71.5% of total, as of end-June 2022). Our expectation is that the Group will continue to target a further reduction in the stock of NPLs via disposals. This should more than compensate for the impact of new NPL inflows that could materialise from 2023 due to inflationary pressure and higher interest rates.
GBCI’s risk profile also reflects a significant concentration in Italian sovereign bonds which are largely classified at amortised cost. The total portfolio of financial assets, including Italian Sovereign bond securities, amounted to around EUR 71.5 billion as of 1H 2022, of which 86% were classified at amortised cost, therefore reducing capital sensitivity to credit spread changes. Nevertheless, for the fixed income portfolio, we still take into account the potential risks from unrealised losses on the back of the recent spike in interest rates.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
The Group maintains a stable funding position, mainly supported by the large retail deposit base of the BCC’s network. Access to the wholesale market is centralised via Iccrea Banca. At end-H1 2022, the Group had around EUR 109 billion in customer deposits (or 69% of GBCI's total funding), up 6% YoY, and a loan-to-deposit ratio of around 83%, as calculated by DBRS Morningstar. Households remain the largest contributor to GBCI's deposit base, representing around 61% of the total. While remaining the Group’s second main source of funding at 18% of total, as of end-June 2022 GBCI’s exposure to the ECB was down 12% YoY, reflecting the partial repayment of TLTRO III sources in Q2 2022, a trend we expect to continue. With the aim to fulfil its MREL minimum requirements, the Bank recently issued a EUR 350 million Senior Preferred bond with a maturity of five years and a coupon of 6.375%.
Capitalisation Combined Building Block (BB) Assessment: Moderate
GBCI’s capitalisation strengthened in recent years, supported by retained earnings, de-risking, the supply of State-guaranteed loans, and the issuance of subordinated instruments, which helped to absorb the negative impact in the valuation reserve triggered by the recent widening in the Italian sovereign spreads. However, the Group’s capital position remains constrained by the still high, albeit reduced, level of NPLs and relatively modest underlying internal capital generation. As of end-June 2022, GBCI’s phased-in CET1 and Total Capital ratios were 17.8% and 19% respectively, up from 16.5% and 17.2% one year earlier. The resulting capital buffers over regulatory minima were solid at 921 bps for CET1 ratio and 567 bps for Total Capital ratio, excluding the ECB's flexible regime on capital requirements which will end from January 1, 2023, and incorporating the opportunity to partly fulfil the Pillar 2 Requirement (P2R) by CET1 Capital, with the P2R being 2.83% for 2022, up from the previous 2.5%. On a fully-loaded basis, the Group’s CET1 and Total Capital ratios stood at 17% and 18.2% respectively, up from 15.4% and 16.1% at end-June 2021.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/405777
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ 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 https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). 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 (17 May 2022), in its consideration of ESG factors.
The sources of information used for this rating include Morningstar Inc. and Company Documents, Iccrea H1 2022 Report, Iccrea H1 2022 Results Press Release, Iccrea Annual Reports 2018-2021, Iccrea Non-Financial Statement 2021. 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/405775
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Nicola De Caro, Senior Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG – Global FIG
Initial Rating Date: July 26, 2018
Last Rating Date: December 1, 2021
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