DBRS Confirms BMPS at BBB with a Negative Trend

DBRS Ratings Limited (DBRS) has today completed its rating review for Monte dei Paschi di Siena SpA (BMPS or the Bank) and has confirmed the ratings. These include the Senior Long-Term Debt and Deposit Rating of BBB, as well as the Short Term Debt and Deposits Rating of R-2 (middle). The trend on the Senior Long-Term Debt and Deposit Rating remains Negative while the trend on the Short Term Debt and Deposit Ratings rating remains Stable. As part of the review process, the Intrinsic Assessment (IA) of BBB (low) was also reviewed and remains unchanged.

The rating confirmation reflects DBRS’ view that BMPS has made sufficient progress in addressing the main issues which underpinned the rating review extension outlined on January 9, 2014. These include the retention and commitment of senior management to complete the Bank’s EU agreed strategic plan, the completion of the recent EUR 5 billion capital increase, as well as further progress in executing BMPS’ restructuring which is needed to maintain the core domestic franchise.

The Negative trend reflects DBRS’ expectation that the environment for Italian banking remains under pressure, as well as BMPS’ specific challenges, including poor asset quality and weak financial performance. As such, rating upside for the IA and the final rating is limited and will likely be linked to BMPS nearing completion of its strategic targets, including an improved funding profile and the full repayment of state support. Concurrently, negative rating pressure could result if there is insufficient progress towards meeting restructuring goals, any inability to satisfy upcoming regulatory hurdles for capital and liquidity, or evidence of a meaningful deterioration in the Bank’s core domestic franchise.

DBRS has maintained the support assessment (SA) of SA-2 assigned to BMPS which provides a one notch uplift from the IA of BBB (low) to the final rating of BBB. This reflects DBRS’ view that BMPS will continue to benefit from systemic support. Support for the Bank has been strongly evidenced by the EUR 4.1 billion in New Financial Instruments (NFIs) provided to BMPS as part of the EU-agreed strategic plan, and EUR 1.1 billion of NFI support will remain in place following EUR 3 billion NFI repayment which took place on July 1st, 2014.

From DBRS’ perspective, the 2013 and Q1 2014 results for BMPS confirm the challenges of the on-going restructuring process, as well as the significant progress to date. Although bottom line results remain negative, the overall trend is one of improvement. BMPS announced a Q1 2014 loss of EUR 174 million and a full-year 2013 loss of circa EUR 1.4 billion, which was down sharply from the loss of EUR 3.2 billion reported one year earlier. Whereas the loss for 2012 incorporated EUR 1.7 billion in goodwill impairment charges, the 2013 result incorporates one-off charges linked to implementing the EU agreed restructuring plan, as well as a continued high level of loan loss provisions due to deteriorating asset quality.

Total lending volumes at BMPS continued to fall throughout 2013 and Q1 2014 in line with the Bank’s selective deleveraging goals. Whereas customers lending across the entire group decreased by 5.6% year on year as of March 2014, the largest proportional decreases were registered at the core Bank, particularly in mortgage lending which at Q1 2014 had decreased by more than 10% versus one year earlier, as well as a marked decrease in overall leasing and factoring exposure at the Group’s subsidiary Consumit, which has been targeted for sale.

In DBRS’s view, BMPS’ asset quality is weak. By end 2013, total impaired lending across all four Italian troubled loan categories increased to 24.4% of total gross loans for MPS and this rose further in Q1 2014 to 25.2%. The average for the Italian banking system was 15.9% as of end 2013. Deterioration at BMPS continued to partly reflect legacy issues, as well as the still weak Italian economic environment. Yet there has been progress towards improving cash coverage, reducing the levels of new impaired asset inflows and the Bank recently concluded its first sizeable non-performing loan (NPL) sale. Other material risks also remain. Whereas the Bank was able to settle the Santorini transaction with Deutsche Bank during H2 2013, the Alexandria transaction with Nomura remains contested and has limited management’s ability to further reduce the Bank’s high exposure to the Italian sovereign.

The funding profile for BMPS was impacted negatively during late 2013 and early 2014 by uncertainty surrounding the strategic plan and capital increase. Nonetheless, the Bank has recaptured much of its lost retail deposit funding during Q1 2014, and has also been able to raise the level of corporate deposits. BMPS’ improved market perception during Q2 2014 also helped to support a meaningful tightening of credit spreads and enabled the Bank to return to wholesale funding markets. Nonetheless, DBRS notes that despite progress towards repayment of the long-term refinancing operation (LTRO) funding and a decrease in reliance on European Central Bank (ECB) funding, the outstanding LTRO balance remains high.

Capitalisation has been an ongoing challenge for BMPS but the situation has improved markedly during 2013 and 2014, as supported via the EUR 4.1 billion of government backed NFIs issued early last year and the deleveraging of the Bank’s balance sheet. With the recent completion of the EUR 5 billion rights issue and the repayment of EUR 3 billion of NFI instruments, as well as EUR 0.5 billion of accrued interest, BMPS’ pro-forma Common Equity Tier 1 (CET1) ratio at March 2014 is expected to improve to 13.3% from 10.8% on a Basel III phased in approach. For DBRS, this provides BMPS an essential capital buffer ahead of the upcoming European level asset quality review (AQR) and stress tests. Nonetheless, depending upon the results, a further need to increase capital cannot be ruled out.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the following: DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports 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: January 18, 2013
Most Recent Rating Update: January 9, 2014

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

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

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.