DBRS: Veneto Banca Returns to Profit in 1H14; Improves Capital

Summary:
• Return to profit supported by revenue expansion and lower provisions
• Asset quality deteriorated further and provisions were insufficient to fully maintain cash coverage levels
• Capital strengthened ahead of AQR and EBA stress tests
• DBRS rates Veneto Banca Scpa Senior Long-Term Debt & Deposits at BB (high) with a Negative trend

From DBRS Ratings Limited’s (DBRS) perspective, Veneto Banca’s (the Bank) results for 1H14 provide some positive signals regarding the Bank’s revenue generation and its capital position. The Bank announced profits of circa EUR 8 million for 1H14, marking a return to profitability following the loss of EUR 39 million in 1H13, which had been driven by higher credit provisions resulting from the Bank of Italy’s investigations. The inspection process was concluded in August 2014 with a EUR 2.8 million fine for the Bank’s previous management team.

Mainly influenced by the tightening in Italian sovereign bond spreads and the improvement in investor confidence towards Italian banking risk, Veneto Banca’s funding costs improved during the period and helped to strengthen net interest income (NII) to EUR 278 million (+5% vs. 1H13). The overall fall in funding costs was essential towards offsetting decreasing interest income which remained affected by the prolonged low interest rate environment, as well as the further deterioration in asset quality.

Improvement in NII was coupled with growth in commission and fee income on banking products and services. Additional revenue improvement was also realised via gains on the sale of portions of the Bank’s sovereign bond portfolio. Taken together, these factors supported the Bank’s revenue growth of 8% in 1H14 (vs. 1H13). Nevertheless, the Bank’s overall profitability remains modest as Veneto Banca reported still high levels of credit costs due to the challenging economic environment in Italy and further deterioration in asset quality.

Veneto Banca’s total ratio of gross impaired loans increased to 18.9% from 17.4% at year-end 2013 (16.2% at end-1H13), and included a sharp spike in sub-standard loans (incagli). Apart from general asset quality weakening, Veneto Banca’s asset quality ratios were also impacted by the Bank of Italy’s inspections which contributed to the 1H14 re-allocation of some exposures to more severely impaired asset categories. Despite the deteriorating asset quality, the Banks’s total provisions for 1H14 did not increase sufficiently to maintain Veneto Banca’s overall cash coverage levels. The total impaired coverage ratio fell to 29.3% at end-1H14 from 30.6% at year-end 2013 which compares unfavourably with the average of the Italian system.

However DBRS views Veneto Banca’s strengthened capital position as an important achievement. The Bank’s Common Equity Tier 1 (CET1) ratio (Basel III phased-in) increased to 8.6% and benefited from the early conversion of the outstanding EUR 350 million soft mandatory convertible bond, and then in July 2014, the Bank successfully completed a capital increase which further improved the Bank’s CET1 ratio (phased-in) to 10.5% (pro-forma at June 2014). DBRS notes that 95% of the planned EUR 499 million capital increase was subscribed by both existing and new Veneto Banca’s shareholder members. As such, this helps to evidence the current support of the shareholder base, as well as the Bank’s ability to attract new members.

Ahead of the pending European Central Bank (ECB) asset quality review and European Banking Authority (EBA) stress tests, Veneto Banca also took further measures towards reinforcing capital. In August 2014, the Bank announced the long anticipated disposal of its majority 51.4% stake in BIM (the private bank and asset management subsidiary) to a consortium of investors, as well as the sale of the 55% stake in Banca IPIBI Financial Advisory. Both sales were part of the capital strengthening plan announced in November 2013 and are targeted for completion by 1H15 subject to the Bank of Italy’s approval. Given the horizon period, both transactions should be compliant with the timeframes set for the EBA stress tests and should contribute up to 87 basis points to CET1 ratio.

DBRS rates Veneto Banca’s Senior Long-Term Debt & Deposits at BB (high) with a Negative trend.

Notes:
In the financial statements for the 1H 2014, the BIM Group was classified under "assets from discontinued operations", pursuant to the IFRS 5 accounting standard, therefore the equity and economic results of BIM Group are not included in the 1H14 figures. Comparison with 2013 figures is then on a pro-forma basis. However, Veneto Banca’s asset quality and impaired coverage ratios for 1H14 and 2013 include BIM Group.

All figures are in Euros (EUR) unless otherwise noted.