DBRS: BPAA 1H14 Profit Improves; Exclusive Talks with BPdM

Summary:
• Increase in provisions to improve cash coverage more than offset by revenue growth
• Capital position remains solid while liquidity buffer has improved
• Exclusive talks with Banca Popolare di Marostica: rating implications uncertain
• DBRS rates Banca Popolare dell’Alto Adige Senior Long-Term Debt & Deposit at BBB with a Negative trend

From DBRS Ratings Limited’s (DBRS) perspective, Banca Popolare dell’Alto Adige (BPAA or the Bank) results for 1H14 provide some positive signals regarding the Bank’s revenue growth, funding and liquidity. The Bank announced profits of circa EUR 11.7 million for 1H14 (+5% vs. 1H13) driven by improved revenues which more than offset the costs of increased provisions.

The Bank’s net interest income (NII) rose by 10% vs. 1H13 driven by higher interest income and lower funding costs which helped to improve margins. In parallel, net commission income increased by 5% year-on-year (YoY) and underscored the resilience of the Bank’s core banking services, as well as the consistency of earnings from the sale of third party products. The combination helped to boost the Bank’s revenue growth (+6% vs. 1H13) and pre-provision income.

The higher revenues allowed BPAA to improve total cash coverage of impaired lending to 27.3% at end-1H14 from 26.0% at FY13 without negatively impacting overall performance. BPAA’s asset quality remained stronger than the Italian banking system average with the total ratio of gross impaired loans of 9.8% in 1H14, the same level as at FY13.

The Bank’s capital remains solid. At end-1H14, BPAA reported a Common Equity Tier 1 ratio (Basel III transitional) of 13.7% which is well above the average of the Italian system. Concurrently, BPAA improved its funding profile and liquidity buffer while reducing its use of ECB funding to EUR 400 million at end-1H14 (FY13 – EUR 500 million), helped by a self-issued residential securitisation of EUR 479 million in February 2014. At end-1H14 the Bank’s loan to deposit ratio was 105.7%, down from 108.5% at year-end 2013 and in parallel, the total liquidity buffer increased to EUR 1.4 billion at end-1H14.

In July 2014, BPAA announced that it had entered into exclusive negotiations for the potential acquisition of Banca Popolare di Marostica (or BPdM), a small cooperative bank based in Veneto’s region with circa EUR 2 billion assets. In DBRS’ view, the transaction could entail significant financial and execution risks for Banca Popolare dell’Alto Adige given the size of the acquisition and the weak financial profile of BPdM. However, the negotiations remain ongoing and the current DBRS ratings on BPAA do not yet consider any potential implications of the possible purchase.

DBRS rates Banca Popolare dell’Alto Adige Senior Long-Term Debt & Deposit at BBB with a Negative trend.

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