DBRS: BPVI Improves Capital & Profits in 1H14

Summary:
• Return to profit supported by improved funding costs and lower provisions
• Asset quality deteriorated further and cash coverage levels remain weak
• Capital strengthened ahead of AQR and EBA 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 1H14 provide some positive signals regarding the Bank’s revenue growth and capital position. The Bank announced profits of circa EUR 22 million for 1H14, returning to profit following the loss of EUR 28 million reported for 2013.

The Bank’s net interest income (NII) slightly improved in 1H14 (+1% vs. 1H13) mainly due to lower funding costs which helped to offset a reduced contribution from the government bond carry trade. BPVI’s sovereign portfolio reduced to EUR 4.8 billion at 1H14 from EUR 5.9 billion at 1H 13 (EUR 3.2 billion at YE 2013). In parallel, net commission income increased by 9% year-on-year (yoy) and underscores the resilience of the Bank’s fee earnings from traditional banking services, as well as the distribution of asset management and insurance products. These factors supported the Bank’s revenue growth in 1H14 (+4% vs. 1H13), as well as the improvement of the cost to income ratio to 57.5%, as calculated by BPVI.

However, the weak economic environment in Italy continues to weigh on the Bank’s asset quality and profitability. BPVI’s total ratio of gross impaired loans increased to 18.7% from 16.6% at year-end 2013 (14.6% at end-1H13), and included a rise in sub-standard loans (incagli). Despite the moderate improvement in cash coverage to 27.8% at end-1H14 from 27.3% at FY13, BPVI’s total impaired coverage ratio remains weak and well below the Italian system average.

More positively, since end-1H14 BPVI has taken steps to strengthen capital ahead of the pending European Central Bank (ECB) asset quality review and European Banking Authority (EBA) stress tests. In August 2014, the Bank successfully completed a EUR 608 million capital increase to existing shareholders/members which improved the Bank’s Common Equity Tier 1 (CET1) ratio (phased-in) to 10.7% from 8.55% (pro-forma at end-1H14). In doing so, BPVI also expanded its shareholder base to more than 106,000 members as of August 2014. In line with the capital strengthening plan announced in February 2014, the Bank aims to further increase the number of new shareholders with an additional EUR 300 million capital increase. Another measure that could improve the Bank’s capital for the upcoming stress tests is the conversion of the EUR 253 million soft mandatory debt issue.

DBRS notes that BPVI’s pro-forma CET1 ratio of 10.7% is calculated as per the standardised methodology, therefore it does not include the potential benefit of advanced internal ratings-based models (AIRB). DBRS also points out that the models will not be deemed eligible for addressing a potential capital shortfall under ECB AQR and EBA stress tests, unless they had been approved by the Bank of Italy prior to the publication of the comprehensive assessment results in October 2014.

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.