DBRS: Creval Returns to Small Profit in 2013 and Announces Capital Strengthening

Summary:
•Return to profit in 2013 following 2012 loss driven by goodwill impairment.
•Underwritten capital increase will improve 2013 pro-forma fully-phased CET1 to 10.9%.
•Cost efficiency and re-pricing support overall earnings while asset quality remains weak.
•DBRS rates Creval Senior Long-Term Debt & Deposit at BBB (low) with a Negative trend.

From DBRS Ratings Limited’s (DBRS) perspective, Gruppo Bancario Credito Valtellinese’s (Creval or the Bank) improved results for 2013 provide some positive signals for the Bank’s franchise. However, overall performance is still modest and Creval’s future earnings generation remains constrained by the weak economic environment in Italy and uncertainty from upcoming regulatory measures at the European level. Creval announced full-year earnings of circa EUR 12 million for 2013, returning to profitability following the loss of EUR 322 million for 2012, which had included the negative impact of goodwill impairment. Stable commission income and capital gains supported the Bank’s total revenues, despite declining net interest income (NII). For the full year, NII fell by 3% year on year, although it improved during H213 mainly due to wider margins. These benefitted from the reduction in overall wholesale funding, as well as Creval’s re-pricing efforts on both loans and deposits. The improved margins partially offset the negative impact of de-leveraging as lending volumes contracted by 8% during the year.

In preparation for the upcoming European Central Bank (ECB) asset quality review (AQR) and the European Banking Authority (EBA) stress test, Creval approved a capital increase up to a maximum amount of EUR 400 million, with a pre-underwriting agreement in place. The capital increase is expected to be completed in the first half of 2014 and it will strengthen the Bank’s regulatory capital by approximately 220bps. As such, the pro-forma Common Equity Tier 1 (CET1), fully loaded under Basel III, should increase to 10.9%, compared to 8.7% at December 2013. DBRS also notes the pro-forma ratios do not include the benefits of the implementation of the advanced internal ratings-based (AIRB) approach which is expected to generate an additional buffer of roughly 150bps.

In 2013, management continued to deliver on efficiency. Total operating costs declined by 6% in 2013 and cost to income ratio improved to 61% from 66% reported in 2012 driven largely by headcount reduction. The Bank’s updated business plan targets additional cost savings during 2014-2016. In particular, management aims to further streamline the Bank’s organisation and Group structure, including the commercial network, further integration of operations and the disposal of non-core assets.

However the weak economic environment in Italy continues to weigh on the Bank’s profitability as loss loan provisions remained higher than historic levels. Creval’s asset quality continued to deteriorate in 2013, albeit at a slower pace in the last quarter of the year. Total net impaired loans increased to EUR 2.7 billion from EUR 2.1 billion one year earlier, with a sharp spike in both Non-Performing and Sub-standard loans. The Bank’s total net impaired ratio reached 13.6% of total loans at year-end 2013, compared to 9.5% at December 2012. As a result, credit costs remained high at 132 bps in 2013, down from 161bps in 2012, although the Bank’s total coverage ratio reduced to 34% at end-2013.

Nevertheless, DBRS believes the announced capital increase will help to stabilize the Bank’s financial position and provide an adequate capital cushion for further asset quality deterioration and the upcoming stress tests. Likewise the broader business plan goals will help to maintain the Bank’s franchise strengths. Together, these help to support DBRS’s ratings on Creval.

DBRS rates Credito Valtellinese’s Senior Long-Term Debt & Deposit at BBB (low) with a Negative trend.

Notes:
All figures are 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: Support Assessment for Banks and Banking Organizations. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include publicly available 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.

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 regulation only.

Lead Analyst: Peter Burbank
Approver: Alan G. Reid
Initial Rating Date: February 7, 2013
Most Recent Rating Update: February 7, 2013

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