DBRS: BPVI 2013 Loss Driven by Loan Impairments

Summary:
• Lower funding costs and improved efficiency supported the Bank’s pre-provision income
• Loan loss provisions doubled to EUR 432 million in advance of the European asset quality review (AQR)
• Capital strengthened ahead of upcoming AQR and stress tests
• DBRS rates Banca Popolare di Vicenza Senior Long-Term Debt & Deposit at BBB (low) with a Negative trend

From DBRS Ratings Limited’s (DBRS) perspective, Banca Popolare di Vicenza’s (BPVI or the Bank) results for 2013 provide some positive signals regarding the Bank’s franchise in terms of margins, efficiency and capital. However, the Banks’s bottom line earnings generation remains hampered by increasing credit costs reflecting the deteriorating asset quality environment in Italy, as well as preparation for the upcoming AQR. Indeed, loan loss provisions doubled to EUR 432 million in 2013 and were the driver of BPVI’s full-year net loss of EUR 28 million.

On a full year basis, the Bank’s Net Interest Income (NII) improved by 3% and was supported by the stability of outstanding customer loans and lower funding costs. The latter was a result of BPVI’s reduced reliance on wholesale funding made possible by the expansion of the Bank’s retail funding base during 2013. As such, the alignment of the Bank’s funding and lending profile improved.

In parallel, net commission income also increased during 2013 and underscored the resilience of traditional banking services, as well as the distribution of asset management and insurance products. Together, higher volumes and commission revenue helped to offset the costs for collateral guarantee received by the Italian Government to access the refinancing operations with the European Central Bank (ECB), as well as customers’ fees for securities lending transactions.

Pre-provision operating income for the year increased by roughly 15% to EUR 429 million and also benefitted from BPVI’s lower costs during the year. Combined with higher revenues, this contributed to improve the Bank’s cost income ratio to 58.5% from 62% in 2012.

However, the weak economic environment in Italy continues to weigh on the Bank’s profitability as the cost of credit for the year increased to 144 bps (up from 71 bps in 2012). This was largely driven by the higher provisions taken during the 2H2013 in advance of the upcoming European AQR. The increased provisioning helped to strengthen the Bank’s coverage ratio across all the impaired loans categories.

Despite the loss reported for the year, the Bank’s capital position improved in 2013. BPVI’s Core Tier 1 ratio increased to 9.2% from 8.2% in 2012 and reflected the circa EUR 300 million increase in capital completed in 2013. This included a rights issue to existing shareholder members, as well as an expansion of the overall shareholder base. In DBRS’ view, this helps to evidence the loyalty of BPVI’s shareholder base, while also highlighting the Bank’s ability to attract new shareholders/members.

In addition to the capital measures completed in 2013, the Bank announced a capital increase of up to EUR 1 billion in February 2014. This will improve the capital cushion and support future growth or potential acquisitions. The transaction includes EUR 700 million offered to the Bank’s existing shareholders/members by the end of 2014 and this portion should increase BPVI’s regulatory capital by approximately 240 basis points. As such, the CET 1 ratio is expected to rise to 11%. DBRS notes that the pro-forma ratio does not yet include the benefits that might result from the adoption of advanced internal ratings-based models (IRB) and the conversion of the EUR 253 million soft mandatory debt issue. In DBRS view, the combination of these capital options provides an adequate capital cushion for further asset quality deterioration and the upcoming stress tests.

DBRS rates Banca Popolare di Vicenza’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. These can be found can be found at: http://www.dbrs.com/about/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: December 18, 2013
Most Recent Rating Update: December 18, 2013

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