DBRS Morningstar Confirms Banca Nazionale del Lavoro’s Long-Term Ratings at A (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banca Nazionale del Lavoro SpA (BNL or the Bank), the Italian banking subsidiary of BNP Paribas SA (BNPP, the Parent or the Group). The ratings include an A (high) Long-Term Issuer Rating and a R-1 (middle) Short-Term Issuer Rating, both with a Stable trend. The rating action follows the confirmation of DBRS Morningstar’s ratings on BNPP on June 21, 2023, and considers BNL’s credit fundamentals and financial performance in 2022. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

DBRS Morningstar has maintained the SA1 support assessment on BNL, which implies strong and predictable support from the Parent. The ratings of BNL are positioned one notch below the ratings of BNPP, in line with DBRS Morningstar’s rating approach for core banking subsidiaries located abroad in countries with low cross-border risk. On June 21, 2023, DBRS confirmed BNPP’s Long-Term Issuer Rating of AA (low) with a Stable trend. The SA1 takes into consideration the 100% ownership of BNL by BNPP, its strategic importance and integration in the Group.

RATING DRIVERS

Given the SA1 designation, BNL’s ratings will generally move in tandem with BNPP’s ratings. An upgrade could follow an upgrade of the parent BNPP’s ratings.

Similarly, a downgrade could result from a downgrade of BNPP’s ratings or should the Bank become a non-core subsidiary for the Group or if BNPP materially decreases its level of support.

RATING RATIONALE

BNL is BNPP’s banking subsidiary in Italy, which BNPP considers to be a domestic market. At end-2022, BNL had EUR 104 billion in total assets. The Bank operates in retail and corporate banking with a nationwide franchise and a solid footprint across Central and Western regions of Italy. The Bank has been part of BNPP since its acquisition in 2006.

BNL is viewed as a core component of BNPP’s retail franchise outside of France. In line with BNPP’s strategy, Italy is considered a key market for the Group together with France, Belgium and Luxembourg. BNL is integrated into the Parent company through shared systems, controls, management and strategy, as well as treasury and risk management. DBRS Morningstar views that BNL’s franchise, product offering and reputation benefit from being part of a larger group. BNL has also consistently benefited from financial support from BNPP in various forms and DBRS Morningstar expects BNPP to continue to support BNL if needed.

At end-2022, BNPP had provided EUR 7.8 billion in total funds to BNL, corresponding to 7.5% of the Bank’s total liabilities and funds. Deposits from retail and corporate customers, however, remain the main source of funding, accounting for 67.5% of the total liabilities and funds. BNL also had EUR 15.7 billion of ECB funds, as a result of the Bank’s participation in the TLTRO III programme, albeit much reduced from EUR 18.7 billion last year.

The Parent also remains committed to maintain BNL’s capital levels. The Bank reported a phased-in common equity tier 1 (CET1) ratio of 12.1% stable from end-2021, and a total capital ratio of 15.5%, up from 14.9% in 2021, which provides a good cushion above the ECB SREP requirements of 8.8% for CET1 and 13.0% for Total Capital.

The Bank’s results in 2022 were driven by higher revenues and lower provisions despite higher operating expenses. Net interest income remained pressured by the reduced commercial spread, although this was compensated for by volume growth. Fees and commissions held up despite the pressured operating environment. Similar to its parent BNPP, BNL continues with the implementation of cost efficiency measures, spanning from business simplification to digital transformation. Nonetheless, operating expenses grew YoY, mainly on higher IT costs. The cost of risk was down around 8% YoY compared to 2021 due to lower migrations to default.

BNL’s risk profile has continued to improve, driven by the still large but declining stock of NPLs. Total gross impaired loans amounted to EUR 3.5 billion at end-2022, down from EUR 4.8 billion at end-2021, thanks to a combination of NPL disposals and write-offs. As a result, the Bank’s total gross NPL ratio decreased to 4.0% at end-2022, from 5.1% at end-2020, which is now more in line with domestic peers albeit still above international peers. DBRS Morningstar expects geopolitical tensions, rising interest rates and high inflation to lead to a rise in defaults. However, we view BNL’s earnings generation capacity, and the backup of its parent as providing some flexibility to absorb any potential deterioration in asset quality.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on BNP Paribas SA are likely to have an impact on this credit rating.
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)

Notes:
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 (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 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents and BNL 2022 Consolidated Accounts. 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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/416227

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: William Schwartz - Senior Vice President - Credit Practices Group
Initial Rating Date: December 11, 2017
Last Rating Date: June 28, 2022

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