DBRS Places BMPS Under Review, Negative Implications

DBRS Ratings Limited (DBRS) has today placed its ratings for Banca Monte dei Paschi di Siena SpA (BMPS or the Bank) under review, with negative implications. These ratings include the Senior Long-Term Debt and Deposit Rating of BBB, as well as the Short-Term Debt and Deposit Rating of R-2 (middle). As part of the review process, the Intrinsic Assessment (IA) of BBB (low) and the notching tied to the SA-2 support assessment will also be re-evaluated.

The rating action follows BMPS’s announcement on 7 October which outlined the updated strategic plan as agreed with the European Commission (EC) and Italian authorities. In DBRS’ view, the broad parameters of the EC agreed plan include more aggressive levels of cost cutting, tougher funding targets and repayment of government capital than the targets contained in former 2015 strategic plan. Importantly, the EC agreed plan also requires the Bank to successfully complete a larger EUR 2.5 billion capital increase in a shorter timeframe. The rights issue, which is still subject to shareholder approval, is to be completed by end 2014 in order to repay 70% of state aid more quickly than originally expected. This abbreviated period increases execution risk for the Bank’s capital plan. Having a shorter time frame makes it harder for the Bank to demonstrate progress towards achieving its strategic targets. The time table set for 2014 may also coincide with market uncertainty associated with the upcoming ECB asset quality review and EBA stress test. This in turn could raise the potential that the EUR 4.1 billion of State backed capital New Financial Instruments (NFIs) will be converted into government shares. Such a conversion would give the Italian authorities a controlling stake in BMPS and could add to uncertainty regarding the Bank’s future direction.

The Bank’s position as Italy’s third largest domestic institution, combined with the progress made by current management towards improving corporate governance and efficiency, as well as stabilizing financial performance, have thus far supported the IA of BBB (low). In DBRS’ view, however, execution of the more aggressive restructuring plan could be disruptive for some portions of the franchise. The review period will allow DBRS to re-evaluate the still weakening asset quality of the Bank, as well as the latest developments provided in the 3Q13 results and any new information on the EC agreed plan once details are announced in November.

DBRS has designated BMPS as a Systemically Important Bank in Italy and assigned an SA-2 support assessment for the Bank. This has provided a one-notch uplift in the final rating of BBB for the Bank. As part of the review, DBRS will consider the strong support provided by the Italian state and the EUR 4.1 billion NFIs, as well as the expectation of additional support, regardless of whether the rights issue is completed. As such, the review could potentially result in wider notching linked to the SA-2 assessment.

Given the negative implications of the current review, positive rating actions are not expected. However, near term success towards meeting the strict EC required timeline for completing the EUR 2.5 billion rights issue, combined with further progress towards improved revenue generation, cost cutting and reduced ECB funding reliance, could support stability in the IA and a confirmation of the current ratings. Any delay in progress towards meeting the EC timeframe or targets, or evidence in the 3Q13 figures of franchise erosion or financial weakening, could support the lowering of the IA and possible negative implications for the current ratings.

DBRS expects the review to incorporate the latest developments at the Bank, any additional details on the Strategic Plan 2013-2017 after approval by the EC, as well as the progress made by the bank towards achieving its goals. The review period is expected to extend into the 1Q14.

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

The principal methodology applicable is: the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

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.

DBRS 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.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

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/statistics/defaults.xhtml.

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

Lead Analyst: Peter Burbank
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 18 January 2013
Most Recent Rating Update: 8 February 2013

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For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf