DBRS Keeps BMPS Under Review, Negative Implications

DBRS Ratings Limited (DBRS) has today announced that its ratings for Banca Monte dei Paschi di Siena SpA (BMPS or the Bank) remain 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 (mid). 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 continuation of the review period follows recent developments surrounding BMPS’s planned capital increase, which extend the uncertainty regarding the Bank’s prospects. On 28 December, BMPS’s Extraordinary General Meeting (EGM) approved the proposed EUR 3 billion equity increase, but postponed the process by over four months. It is now to commence on May 12, 2014 instead of in January 2014. The decision to delay raising the capital was strongly influenced by BMPS’ main shareholder the “Fondazione”, which had sought to extend the timeframe available for selling its large share of the Bank. Prior to the EGM, BMPS confirmed to investors that the Bank had obtained an underwriting agreement from a group of 10 investment banks, led by UBS, for a cash call to commence in January 2014. BMPS Senior Management underscored their commitment to the January timeframe and suggested that management might resign, if the “Fondazione” forced a delay to the process. News on whether there will be any Senior Management departures is expected on or before 16 January 2014.

DBRS originally placed BMPS’ ratings under review on 17 October 2013, citing the more aggressive restructuring goals and execution risk for raising capital outlined in the plan agreed with the EU in early October. BMPS has made progress towards achieving the more challenging plan over the past few months, including securing a timely agreement to underwrite the equity increase. Additionally, BMPS concluded the settlement with Deutsche Bank over the Santorini transaction, completed the outsourcing of back office services and showed evidence of further de-leveraging. These and other factors help to support the Bank’s plans to improve performance in line with the plan. DBRS is continuing its review of the Bank’s ratings, but the review will now also focus on the risks associated with the potential departure of key Senior Management, including the possible damage to the Bank’s franchise should there be a pro-longed period of uncertainty.

In DBRS’s opinion, the current uncertainty has the potential to distract management across the organization (not just at the senior level), making further progress on the restructuring of the Bank more difficult to accomplish. DBRS also notes that BMPS’ ability to achieve the EU required capital increase may be jeopardized due to the uncertain position of management, as well as the effective expiry of the underwriting agreement. In concluding the rating review, DBRS will consider the decision by Senior Management expected in mid-January, the progress made towards re-negotiating a new underwriting agreement for the capital increase, as well as any impact that the period of uncertainty has had on the strength of the Bank’s franchise.

DBRS would view a quick resolution to the current situation that retains senior management and secures an amended capital underwriting agreement as contributing to stability for BMPS. This would allow management to focus on completing the business and operational portions of the EU approved restructuring plan, while also dealing with the upcoming EU level Asset Quality Review (AQR) and stress tests. Such an outcome could support maintaining the current BMPS ratings.

The resignation of key Senior Management, however, would be negative for the Bank’s rating. DBRS would need to consider the extent to which the Bank’s ability to secure new and timely underwriting in line with the EU time agreements was jeopardized by these events, as well as the impact that this period of uncertainty may have on the Bank’s franchise strength. Any protracted period of uncertainty could damage BMPS’ ability to retain customers and preserve business levels. Such a scenario could materially increase the likelihood that BMPS could be nationalized, which adds to the uncertainty about BMPS’ prospects and would need to be incorporated into the rating.

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. These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company documents. 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: January 18, 2013
Most Recent Rating Update: October 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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