DBRS Assigns BBB (low) Rating to Banca Popolare di Vicenza, Trend Negative

On December 18, 2013 DBRS Ratings Limited (DBRS) assigned new ratings to Banca Popolare di Vicenza Scpa (BPVI, the Bank or the Group). These ratings include a Senior Long-Term Debt and Deposit Rating of BBB (low) and a Short-Term Debt and Deposit Rating of R-2 (low). The Trend on both ratings is Negative. At the same time, DBRS assigned an Intrinsic Assessment (IA) to the Group of BBB (low), a support assessment of SA-3 and an Issuer Rating of BBB (low).

The IA of BBB (low) reflects BPVI’s sizeable and stable market positions for its retail and small- and medium-sized enterprise (SME) franchise across many of the principal industrial regions of Northeastern Italy. The IA also reflects BPVI’s only satisfactory financial performance which has come under pressure due to the difficult economic conditions in Italy. Established in 1866, BPVI has expanded its operations significantly since 2001 via a combination of acquisitions and organic growth and now ranks as Italy’s 11th largest banking group. Given the fragmentation of the Italian banking system, DBRS does not incorporate the expectation of timely support for BPVI in the event of a highly stressed scenario. As such, DBRS has assigned an SA-3 support designation which does not provide upward rating support for the IA. The final rating for BPVI of BBB (low) is thus equal to the IA. DBRS does not expect any near term positive rating dynamic for BPVI. The Negative Trend assigned to the rating principally reflects the direct challenges that the poor economic environment poses for Italian banks.

BPVI has sizeable market shares, including an 18% share of deposits in its core market of the Province of Vicenza and the surrounding areas. Across the regions of Veneto and Friuli, the Bank has shares well above 5%. As of June 2013, the Bank reported total assets of more than EUR 46 billion, a customer base of 1.3 million and a franchise presence in 16 of Italy’s 20 regions, supported by 640 branches and 5,500 employees. DBRS notes that the Bank’s national market share ranks at roughly 2%.

The Bank’s earnings power is modest and has been impacted by the challenging Italian environment which has added to funding costs and reduced overall margins and profitability. The carry trade on the Bank’s sovereign portfolio, funded by the long-term refinancing operation facilities (LTRO), has helped to partially offset margin pressure, yet is only a temporary benefit. Overall, BPVI’s margins are lower than peers and will come under pressure once the carry trade is wound down. Earnings have also been impacted by pressure to maintain competitive lending terms for shareholder clients, as well as the rigidity of the Bank’s cost structure. DBRS notes that efficiency has improved and that management has targeted further progress, but this may prove insufficient to fully offset possible increases in credit costs and provisioning which may be impacted by ongoing economic weakness, as well as the upcoming European level asset quality review (AQR).

BPVI’s risk profile is consistent with its retail and commercial banking franchise, with roughly 92% of risk weighted assets for the Group linked to credit exposures. One third of lending relates to households (principally conservative residential mortgages), with another third linked to SME business, including troubled SMEs which are dependent upon domestic demand. These have continued to form the bulk of BPVI’s doubtful loan portfolio which has expanded at a high rate in recent periods. As at June 2013, doubtful loans reached 14.6% of total lending, in line with the Italian system average. DBRS notes that BPVI’s asset quality was reviewed by the Bank of Italy (BoI) during 2012, yet the Bank’s total cash provision coverage levels for doubtful lending are well below system average.

The Bank’s funding is largely retail based via both deposits and retail bonds – a profile which DBRS views as satisfactory. During recent periods, BPVI has further expanded its retail deposit base and the Bank has realized a shift from sight and retail bond funding into longer maturity and less expensive time deposits. Nonetheless, despite improvement over the past two years, the Group’s loan to deposit (LTD) ratio (as calculated by DBRS) of 119% at June 2013 remains higher than peers and BPVI will need to improve this further in the medium term. The Bank’s liquidity position is solid. BPVI reports unencumbered assets of EUR 5.8 billion as of November 2013, which provides some comfort for future LTRO repayments of EUR 3.3 billion, as well as bond redemptions over 2H13 and 2014. DBRS notes that the Bank has made strong progress towards meeting Basel III net stable funding and liquidity ratio requirements.

On the capital front, BPVI has reported stronger capitalization than some peers with core tier 1 (Basel II) on a pro-forma basis of 9% at June 2013, which benefitted from the capital increase of EUR 253 million completed in August 2013 as well as the expansion of member shareholders to nearly 80,000 in September. The Bank is well positioned with a sizeable capital ratio buffer in the form of its soft mandatory convertible and its planned application of advanced internal ratings-based (IRB) models for much of the loan portfolio. DBRS notes that this cushion may well prove necessary should BPVI be negatively impacted by the upcoming European level AQR, particularly if the Bank is required to increase cash provision coverage levels.

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, Bank of Italy 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.

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: Roger Lister
Initial Rating Date: December 18, 2013
Most Recent Rating Update: December 18, 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

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