DBRS Assigns BBB Rating to Banca Popolare dell’Alto Adige, Trend Negative

DBRS Ratings Limited (DBRS) has today assigned new ratings to Banca Popolare dell’Alto Adige Scpa (BPAA or the Bank). These ratings include a Senior Long-Term Debt and Deposit Rating of BBB and a Short-Term Debt and Deposit Rating of R-2 (high). The Trend on both ratings is Negative. At the same time, DBRS assigned an Intrinsic Assessment (IA) to the Bank of BBB and an Issuer Rating of BBB and an SA-3 support assessment.

The IA of BBB reflects BPAA’s solid and stable franchise across some of the key industrial and commercial districts in the wealthy province of Bolzano, as well as the Bank’s earnings track record, resilient credit quality and satisfactory capitalization. Concurrently, the IA also considers BPAA’s weaker competitive position across the Friuli Venezia Giulia and Veneto regions, as well as the Bank’s current reliance on European Central Bank (ECB) borrowings and the need to improve operating efficiency.

Significant improvement in efficiency and funding, if combined with a strengthening of BPAA’s broader franchise and overall financial position, could support upward rating pressure. Any material deterioration in BPAA’s financial position or a weakening of its core franchise could contribute to downward pressure on the rating. The Negative Trend largely reflects the direct challenges that the unfavourable economic environment poses for Italian banks.

Given the SA-3 support assessment for BPAA, there is no uplift for systemic support for the final rating above the Bank’s IA. Whereas DBRS acknowledges that support might be forthcoming in the event of a highly stressed scenario, in DBRS’ view, the likelihood and predictability timely support are not sufficient for any uplift, given the small size and regional nature of BPAA’s franchise.

BPAA operates in one of Italy’s wealthiest geographic areas and the relative strength of the regional economy in Trentino Alto Adige has supported BPAA’s overall credit quality and performance. Likewise, many of BPAA’s small- and medium-sized enterprise (SME) customers have benefitted from their cultural and economic ties with Germany and Austria.

DBRS views BPAA’s earnings capacity as satisfactory as demonstrated by the consistent contribution to the Bank’s equity base, despite the difficult economic environment. Indeed, the Bank’s earnings have remained more stable than those of most Italian banks. BPAA’s financial profile is modestly diversified and it has been impacted by increasing funding costs and the low
interest rate environment. Although management has improved efficiency in recent years, BPAA’s cost income ratio remains high and above many of BPAA’s peers. Nonetheless, BPAA’s provisioning needs, which are lower than peers, have helped to maintain the Bank’s modest earnings performance.

DBRS views BPAA’s risk profile as moderate. The lending portfolio is fairly diversified by sector, yet despite the granular nature of most of the portfolio, DBRS notes that there are client concentrations in the SME portfolio. Geographically, the bulk of the credit exposure is concentrated in the wealthy region of Trentino Alto Adige where asset quality has deteriorated at a slower pace than the Italian system at large. Indeed, the Bank’s gross impaired ratio increased to 9.8% at year-end 2013, but it remains significantly below the average for the Italian banking system.

In DBRS’s view, BPAA’s funding profile is supported by the Bank’s retail funding from deposits
and retail bonds. Retail funding contributes 98% of the total Bank’s direct funding pool as of December 2013. However, DBRS notes the Bank has EUR 500 million long term refinancing operation (LTRO) borrowings which, in part, were used to fund debt maturities in 2012 and will need to be repaid in 2015. Moreover, BPAA’s liquidity buffer is only acceptable in DBRS’ view. Total unencumbered assets, which include Italian government bonds, amounted to EUR 720 million in January 2014, but this cushion could be materially decreased with repayment of LTRO funds.

Given the Group’s risk profile, DBRS views BPAA capital position as solid. At year-end 2013, the Bank reported a Core Tier 1 under Basel 2 of 12.9% which is above the Italian banking system average. The quality of capital is good and, according to BPAA management’s estimates, the capital impact under Basel 3 is negligible.

Notes:
All figures are in Euro (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: Support Assessment for Banks and Banking Organisations. 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: February 18, 2014
Most Recent Rating Update: February 18, 2014

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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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