DBRS Confirms Monte dei Paschi at BBB, Negative Trend

DBRS Ratings Limited (DBRS) has today confirmed its ratings for Banca Monte dei Paschi di Siena SpA (MPS or the Bank). These ratings include a Senior Long-Term Debt and Deposit Rating of BBB with a Negative Trend, as well as a Short-Term Debt and Deposit Rating of R-2 (mid) with a Stable Trend. Concurrently, DBRS confirmed the Intrinsic Assessment (IA) for the Group of BBB (low) and a support assessment of SA-2.

The rating confirmation follows the Bank’s accounting restatement for derivatives contracts linked to three separate market transactions (Alexandria, Santorini and Nota Italia) dating back as far as 2006. The combined impact of the restatements contribute to the recognition of EUR 730 million in losses upfront, offset by future additional earnings through 2034 due to lower future financial charges. The future benefit is expected to range between EUR 24-27 million annually for the period 2013-2016, yet future levels could increase should interest rates rise.

DBRS views the capital impact of the derivative restatement negatively, yet notes that MPS’ pro-forma capitalization levels of roughly 12.1% Core Tier 1 remain appropriate for the intrinsic assessment of BBB (low) taking into account the difficult environment in which the Bank is operating. This pro-forma ratio considers the end of September 2012 balance sheet adjusted for the EUR 730 million restatement, the pending EUR 4.07 billion capital injection via state bonds, repayment of the outstanding Tremonti bonds, as well as the negative valuation adjustment on MPS’ Italian Government securities in the Available for Sale (AFS) book.

DBRS has not observed a material or sustained deterioration in the Bank’s funding and liquidity profile linked to the restatement. MPS reports no impact on retail and core commercial deposits, yet the continuation of negative press certainly dampens the Group’s ability to access markets. The growing list of legal challenges, restatements and other items linked to the Bank under its former management team suggests an historical pattern of poor operational risk management and compliance at MPS. Nonetheless, DBRS views positively the actions by the new management team to rectify past problems.

MPS had announced in November 2012 that it would increase the state bond issuance to EUR 3.9 billion from EUR 3.4 billion in order to provide an additional cushion for future possible adjustments. At present, the Bank plans to issue EUR 4.07 billion on 15 February, which includes a further increase to cover the 2012 interest expense on MPS’ EUR 1.9 billion of outstanding Tremonti bonds.

The Long Term Rating Trend remains negative. This trend reflects the considerable downside risks to economic growth in Italy and the direct challenges that the difficult environment poses for the Bank. In addition, DBRS notes that MPS’ ability to absorb further material or burdensome adjustments to its financials and franchise is limited. The identification of further significant items, any failure of the pending capital injection or negative conditions imposed by the EU for approval of the restructuring plan, could result in a review of the ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on July 7, 2014, to reflect the correct link to the methodologies used.]

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Ratings assigned by DBRS Ratings Limited are subject to EU regulation only.

Lead Analyst: Peter Burbank
Approver: Alan G. Reid
Initial Rating Date: 18 January 2013
Most Recent Rating Update: 18 January 2013

For additional information on this rating, please refer to the linking document under Related Research.