DBRS Assigns Long Term Rating of A (Low) to Intesa SanPaolo Trend Negative

DBRS Ratings Limited (DBRS) has today assigned new ratings to Intesa SanPaolo SpA (Intesa SanPaolo, the Bank or the Group). These ratings include a Senior Long-Term Debt and Deposit Rating of A (low) and a Short-Term Debt and Deposit Rating of R-1 (low). At the same time, DBRS assigned an Intrinsic Assessment (IA) to the Group of A (low) and a support assessment of SA-2. Concurrently, DBRS has assigned an A (low) rating to the government backed securities of Intesa SanPaolo, a rating of BBB (high) to the Group’s Mandatory Pay Subordinated Debt and Cumulative Discretionary Pay Subordinated Debt, a rating of BBB to the Bank’s Non-Cumulative Discretionary Pay Subordinated Debt, and a rating of BBB (low) to the Preference Shares of the Bank. The Trend on all long term ratings is Negative and Stable on the short term.

The IA of A (low) reflects the strength of Intesa SanPaolo’s Italian franchise, the diversity and depth of the Group’s customer base and its broad product offerings which together support Intesa San Paolo’s leading position in the Italian retail and commercial banking markets. The IA also reflects the Group’s improved revenue generation mix and its ability to maintain adequate pre-provision operating earnings throughout the recent years of banking system pressure while also exhibiting satisfactory liquidity and capital positions. This has been actively supported by management’s efforts to improve efficiency and costs across the Group.

Nonetheless, the bank’s earnings capacity remains pressured by the tough environment for retail commercial banking in Italy which, in DBRS’s view, remains challenged by poor margins and higher credit losses. The adverse interest rate environment continues to weigh on Net Interest Income (NII), as lower interest rates have reduced yields on assets by more than funding costs despite maintaining higher margins than peers. Likewise, Loans Loss Provisions (LLPs) continued to represent a burden as a result of the worsening credit environment in Italy and higher provisioning standards. As a result, the Group’s net income contracted to EUR 422 million in 1H 2013 from EUR 1,274 million in 1H 2012. The forthcoming asset quality review by European Central Bank and next round of the EBA stress test may put further pressure on bank financials in general, including those of Intesa SanPaolo.

The potential negative impact from the evolving regulatory requirements is incorporated in our Negative trend, which also reflects the challenges posed by the weak economic conditions in Italy and uncertainty in the outlook for the Eurozone. Positive rating implications could develop following a recovery in asset quality and a return to more normal conditions for wholesale funding as well as marked improvement in funding costs. On the other hand, the rating could be affected should the macroeconomic and / or sovereign situation in Italy worsen markedly and contribute to a substantial weakening of Intesa SanPaolo’s economic fundamentals. A stronger or prolonged deterioration in the domestic retail and commercial banking or a meaningful deterioration of the corporate lending book could all contribute to a negative impact on the Bank’s ratings.

DBRS views Intesa SanPaolo as a systemically important bank in Italy. As Italy’s largest provider of financial services to the business and financial sector and a key participant in the financial markets, significant distress for Intesa SanPaolo, if not addressed promptly, could materially affect Italy’s financial system and the country’s payment mechanisms. As such, DBRS assigns an SA-2 designation support for Intesa SanPaolo, which indicates an expectation of timely systemic support for the Group in the event of a highly stressed scenario. However, with the current rating for the Italian sovereign at the same level as the IA for Intesa SanPaolo, there is currently no uplift to the Group’s ratings. The final rating for Intesa SanPaolo of A (low) is thus equal to the IA.

DBRS views Intesa San Paolo’s risk profile as consistent with its focus as a retail and commercial bank and roughly 85% of total RWAs are credit-linked. The lending portfolio is fairly diversified by sector and, to a lesser extent, by granularity of client base. Although the bank remains overwhelmingly exposed to Italy by virtue of its domestic franchise, the weakening of the Bank’s credit’s quality has been less severe than most Italian peers. Intesa San Paolo’s total impaired lending ratio increased to circa 14% of total gross loans in 1H 2013 from 10% in 2011 but has remained below the Italian system average. DBRS notes that the total amount of impaired loans reflects the Bank of Italy’s definition and classification which are relatively strict by international comparison and, in DBRS’ view, makes an exact comparison of impaired loans with non-Italian peers difficult.

In the context of difficult access to wholesale funding for Italian banks, Intesa SanPaolo has been able to address its funding needs thanks to the support of its solid retail base and the access to LTRO borrowings. Although the Bank’s access to the international funding market has remained stronger than Italian peers, the Bank has continued to reduce its reliance on wholesale funding by increasing its deposit base, de-leveraging and shortening the asset duration. Intesa SanPaolo has taken further steps towards “normalising” its funding profile by repaying a sizable portion of its LTRO borrowings (EUR 12 billion or one third of LTRO borrowings) during 1H 2013. With EUR 85 billion of unencumbered assets, mainly composed by Italian government bonds, the Group has significant excess liquidity coverage over its bonds’ maturities.

In DBRS’s view, the bank’s capital position is adequate for the Group’s risk profile. However, it remains pressured by the precarious economic environment in Italy and uncertainties on the evolving regulatory requirements. The Basel 2 Core Tier 1 ratio has increased to 11.1% in 1H 2013 from 6.3% in 2008 and it remains above the average for the Italian peers. Under Basel 3, the Banks calculates a pro-forma Common Equity Tier 1 fully loaded of 11% which is above the maximum level required for global systemically important financial institutions (G-SIFIs) (9.5%), although Intesa SanPaolo is not classified as a G-SIFI. However, it still incorporates a significant amount of Deferred Tax Assets (DTAs), which have been converted under Italian Law (n. 214/2011) into Basel 3 qualified “Government Claims”. DBRS views this conversion as appropriate, yet also recognizes that the DTA component is clearly a weaker form of capital.

Notes: All figures in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments, Rating Bank Preferred Shares & Equivalent Hybrids, and Rating Bank Subordinated Debt & Hybrid instruments with Discretionary Payments. The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

[Amended July 7, 2014 to reflect the actual 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
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 19 September 2013
Most Recent Rating Update: 19 September 2013

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/

The conditions that lead to the assignment of a Negative or Positive Trend are generally resolved within a twelve month period. DBRS’s trends and ratings are constantly under surveillance.

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