DBRS Assigns BBB (low) Rating to Banca Sella Holding, Trend Negative

DBRS Ratings Limited (DBRS) has today assigned new ratings to Banca Sella Holding SpA (Banca Sella or the Group). These ratings include a Senior Long-Term Debt and Deposit Rating of BBB (low) and a Short-Term Debt and Deposit Rating of R-2 (low). The trend on both ratings is Negative. At the same time, DBRS assigned an Intrinsic Assessment (IA) to the Group of BBB (low) and an Issuer Rating of BBB (low).

The IA of BBB (low) reflects Banca Sella’s well diversified business franchise, as well as the Group’s solid funding profile and brand recognition. Concurrently, the IA also considers the relative weakness of Banca Sella’s competitive position outside its home region of Piedmont, the Group’s modest capitalisation, relatively weak operating efficiency, as well as the private ownership structure which may contribute to limited flexibility in raising capital.

If the Group were to show a significant improvement in both efficiency and capital, combined with a meaningful track-record for strengthening further the franchise outside of Piedmont, while also continuing to reinforce improvements in Banca Sella’s corporate governance, this could support upward rating pressure in the medium term. Any material additional deterioration of the Group’s asset quality, or the inability of Banca Sella to reach its higher capitalisation goals, would contribute to downward pressure on the IA and the final rating. The Negative trend reflects the ongoing pressure on Group’s asset quality and profitability, stemming from the still weak economic environment in Italy.

DBRS has also assigned an SA-3 support designation to Banca Sella which highlights DBRS’ view that the Italian authorities may be less inclined to directly support Banca Sella in the case of a systemic crisis given the Group’s small size nationally.

Within the fragmented Italian banking sector, Banca Sella has a niche franchise with limited coverage nationwide. Nevertheless, the Group enjoys a solid retail market position in the wealthy region of Piedmont, particularly in its home province of Biella. In addition, unlike many peers, Banca Sella’s franchise is well diversified across mainstream retail banking operations, payment system activity and services, as well as private banking. Banca Sella has built a sufficiently sized private banking business which has benefitted from its solid reputation. Unusual for a Group of its size, Banca Sella has also established a relatively large and nationally relevant market position in Italian electronic payments and e-commerce.

DBRS views Banca Sella’s earnings capacity as generally modest, but recognizes that its performance has remained relatively consistent and more resilient than many peers throughout the prolonged economic downturn in Italy. The well-diversified franchise has contributed to solid commission income, and the stability of the loan book and the limited exposure to the wholesale funding have supported the Group’s Net Interest Income. Nonetheless, overall profitably remains constrained by Banca Sella’s high cost base, as well as the growing level of credit charges.

The Group’s asset quality has deteriorated due to the weakening of Italian economic conditions and the challenges faced by small- and medium-sized enterprises (SMEs) reliant on domestic business and real estate. Banca Sella’s total gross impaired ratio increased to 13% at year-end 2013. Nonetheless, this compares well with the average for the Italian banking system (15.9%) and Banca Sella’s cash provisioning levels remain adequate, in DBRS’ view, and are generally more prudent than most peers. At year-end 2013, Banca Sella reported cash coverage ratios of 44% for total impaired lending and 59% for bad debts, or “sofferenze”.

In DBRS’s view, Banca Sella’s funding profile is underpinned by its solid retail base which is generally aligned with lending activity. Given the Group’s loan to deposit ratio of 89% (including retail bonds), Banca Sella’s reliance on wholesale market funding is limited. Nonetheless, the Group borrowed long-term refinancing operation (LTRO) funds of EUR 550 million which were partially used to generate carry trade earnings. At year-end 2013, Banca Sella’s LTRO exposure represented roughly 4% of the bank’s total assets, which is a lower level of LTRO borrowing compared to most Italian banks.

In DBRS’ view, the Group’s liquidity buffer appears sound. Total unencumbered assets, which are mainly comprised of Italian government bonds, amounted to EUR 1.8 billion at April 2014, and provide adequate cushion for future LTRO repayments, as well as all bond maturities for the 2014-2016 period.

Banca Sella’s capital position is generally modest. At year-end 2013, the Group reported a Basel II Core Tier 1 ratio of 8.4% which is significantly below the average of the Italian banking system and close to the 8% minimum Common Equity Tier 1 (CET1) ratio required under the European Central Bank (ECB) asset quality review (AQR). Although Banca Sella is not part of the ongoing ECB AQR and stress tests due to its smaller size, DBRS considers that pressure for the Bank to strengthen capital is likely to increase. However, given the family ownership structure, DBRS considers that the Bank’s flexibility to raise additional capital may be constrained.

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 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: July 7, 2014
Most Recent Rating Update: July 7, 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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