DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Cassa Centrale Banca – Credito Cooperativo Italiano S.p.A. (Cassa Centrale Banca or CCB or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). Concurrently, DBRS Morningstar confirmed the Bank’s Long-Term Deposit Rating at BBB, 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 is Stable. The Bank’s IA is maintained at BBB (low) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.
KEY RATING CONSIDERATIONS
Cassa Centrale Banca – Credito Cooperativo Italiano S.p.A. is the central entity of Gruppo Bancario Cooperativo Cassa Centrale Banca Credito Cooperativo Italiano (Cassa Centrale Group or GBC or the Group).
The confirmation of the ratings and the Stable trend take into account the Bank’s primary role as the central institution of the second largest cooperative banking group in Italy, as well as its adequate funding, liquidity and capitalisation. We note that the Group has continued to streamline its structure and improve its risk profile, however we see increased risks for asset quality in the current environment due to higher interest rates, high inflation and slowing economy. Nevertheless, in our view GBC enters this phase of renewed uncertainty with a stronger balance sheet, given the de-risking achieved, the ample capital buffers, and the very high coverage levels on non-performing loans (NPLs) and performing loans.
Our ratings continue to incorporate the Group’s relatively modest underlying profitability, which is constrained by low revenue diversification, moderate operating efficiency and above-average, albeit reduced, credit costs. We expect future profitability to take advantage of the higher interest rate environment and lower cost of risk given the improved risk profile, however lower non-core income as well as higher operating expenses due to high inflation will likely curtail part of the benefit. In addition, our ratings take into account the Group’s moderate business diversification by geography and product, as well as the concentration risk arising from GBC’s sizeable exposure to Italian government bonds.
An upgrade of the ratings would require a sustained improvement in underlying profitability and further progress in improving asset quality while maintaining adequate capitalisation.
A downgrade of the ratings would occur should asset quality deteriorate materially. A sustained weakening of profitability could also lead to a downgrade.
Franchise Combined Building Block (BB) Assessment: Moderate
Cassa Centrale Banca is the central institution of the second largest Italian cooperative banking group, which aggregated 69 cooperative banks (BCCs) as of October 2022, with combined assets of around EUR 96 billion at end-June 2022. GBC has a moderate footprint across Italy, rather concentrated in the North-East where the Group originated, serving mostly households and SME clients. In our view, the cohesion agreement and the guarantee scheme resulting from the establishment of the new Group in 2019 under the reform of the cooperative banking sector in Italy, have strengthened coordination and control within the Group, as well as underpinned its solvency and financial stability. Given the still rather complex structure of the Group, we expect GBC to take further measures to enhance integration and consolidation.
Earnings Combined Building Block (BB) Assessment: Moderate/Weak
GBC's underlying earnings power remains relatively modest in our view, mainly constrained by the low revenue diversification, moderate operating efficiency, and above-average, albeit reduced, credit costs. In H1 2022, the Group reported net attributable income of EUR 445 million, up 45% Year-on-Year (YoY). Total revenues were up 13% YoY in H1 2022, largely supported by higher contribution to net interest income from securities, mainly inflation-linked Italian government bonds, and higher net fees from payment services. The cost-to-income ratio reduced by 4 p.p. to around 60% in H1 2022, as calculated by DBRS Morningstar, driven by higher growth in revenues. Loan loss provisions were down 41% YoY in H1 2022, and the annualised cost of risk was around 28 bps, down from the average 110 bps in 2019-2021. We expect GBC's cost of risk to remain below the level experienced in recent years, although increasing from the level in H1 2022 due to higher risks for asset quality in the current environment.
Risk Combined Building Block (BB) Assessment: Good/Moderate
The Group’s risk profile has continued to improve, supported by organic workout, NPL sales, lower than expected new NPL inflows due to the pandemic, and better quality new lending. However, GBC’s asset quality metrics remain relatively moderate by international standards. GBC reported a stock of gross NPLs of around EUR 2.7 billion as of end-June 2022, down 17% YoY, corresponding to a gross NPL ratio of 5.4% (1.4% net of provisions), down from 6.9% (2.4%) one year earlier. Most of the Group’s loan book is concentrated in households and SMEs, with limited exposure to large corporates. We see increased risks for asset quality in the current environment due to higher interest rates, high inflation and slowing economy. However, in our view, GBC enters this phase of renewed uncertainty with a stronger balance sheet, given the de-risking achieved and the very high coverage levels on NPLs (76% as of end-June 2022, up from 66.5% one year earlier) and performing loans (1.2%, up from 0.9%). The Group’s securities portfolio represented around 41% of GBC’s total assets as of end-June 2022, and it was highly concentrated in Italian sovereign bonds reclassified at amortised cost (AC).
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
We see GBC’s funding profile as adequate, supported by the large, sticky and highly fragmented retail deposit base of the BCCs, and centralised access to the wholesale market via CCB. Deposits with retail and SME clients are the main source of funding for the Group, accounting for 72% of its total funding as of end-June 2022. Deposits more than covered the loan book, with a loan-to-deposit ratio of around 78%, as calculated by DBRS Morningstar. As of end-June 2022, GBC's exposure to the ECB represented 19% of total funding, and it was down 13% YoY, driven by the partial repayment of TLTRO III sources, a trend we expect to continue. Outstanding issued bonds as of end-June 2022 entirely consisted of securities privately placed with retail customers and certificates of deposit, accounting for just 4% of GBC's total funding. However, in October 2022, CCB completed the inaugural EUR 200 million senior preferred bond issuance privately placed with Cassa Depositi e Prestiti (CDP) under its EUR 3 billion Euro Medium Term Notes (EMTN) Programme. GBC’s Liquidity Coverage Ratio (LCR) and its Net Stable Funding Ratio (NSFR) were strong at around 262% and 142% respectively as of end-June 2022.
Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
In our view, GBC's capital position is adequate, underpinned by the robust capital base and rather low capital usage in its business model. However, the relatively modest underlying internal capital generation as well as the lower than average flexibility to raise capital if required, constrain the Group's capital accretion ability. As of end-June 2022, GBC reported its phased-in CET1 and Total Capital ratios both at around 22.3% (or 21.4% on a fully loaded basis), up from 20.9% one year earlier, but slightly down from 22.6% at end-2021 due to higher Risk-Weighted Assets (RWAs), reflecting business growth. As a result, at end-June 2022 GBC held solid buffers of 1,391 bps and 934 bps respectively over its SREP minimum requirements for CET1 and Total Capital ratios, excluding the ECB's relaxation of regulatory minima which has ended from January 1, 2023, and encompassing a Pillar 2 Requirement (P2R) of 2.5%, up from 2.25% in 2021. The SREP levels for 2023 are unchanged compared to 2022.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/409250.
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, Cassa Centrale Banca H1 2022 Report, Cassa Centrale Banca H1 2022 Results Press Release, Cassa Centrale Banca Annual Reports 2018-2021, Cassa Centrale Banca H1 2022 Pillar 3 Report, and Cassa Centrale Banca 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/409251.
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: William Schwartz, Senior Vice President – Credit Practices Group
Initial Rating Date: February 8, 2022
Last Rating Date: February 8, 2022
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