DBRS Confirms Intesa SanPaolo rating at A (Low), Negative Trend

DBRS Ratings Limited (DBRS) has today confirmed the A (low) Senior Long-Term Debt and Deposit rating of Intesa SanPaolo SpA (Intesa SanPaolo, ISP, the Bank or the Group), and its R-1 (low) Short-Term Debt and Deposit Rating. The trend remains Negative on the long term rating and Stable on the short term rating. Concurrently, DBRS has confirmed the Group’s Intrinsic Assessment (IA) at A (low) and maintained a support assessment of SA-2.

The SA-2 considers Intesa SanPaolo’s role as a systemically important institution to the financial system in Italy and DBRS’s expectation of timely systemic support in the event of a highly stressed scenario. However, with the current rating for the Italian sovereign at the same level as the intrinsic assessment for Intesa SanPaolo, there is currently no uplift to the Group’s ratings. The final rating for Intesa SanPaolo of A (low) is thus equal to the IA.

The confirmation of the IA at A (low) reflects the strength of Intesa SanPaolo’s Italian franchise, the diversity and depth of the Group’s customer base and its broad product offerings which together support Intesa San Paolo’s leading position in the Italian retail and commercial banking markets. The IA also reflects the Group’s improved revenue generation mix and its ability to strengthen its coverage ratios while also exhibiting solid liquidity and capital positions. Concurrently, the A (low) rating incorporates still elevated levels of cost of risk and the large portfolio of impaired loans which, together, constrain the Banks’ earnings capacity and return on capital.

The Negative trend reflects DBRS’ assessment that risks stemming from the weak economic conditions in Italy, as reflected in DBRS’ 10 October 2014 confirmation of the Negative trend on the Italian sovereign rating, and the geopolitical uncertainty in Central Eastern Europe (CEE) and Commonwealth of Independent States (CIS) remain skewed to the downside. Positive rating implications could develop following a recovery in asset quality and a return to “normalised” cost of risk. However, negative rating pressure would likely result should the macroeconomic and / or sovereign situation in Italy worsen markedly and contribute to a substantial weakening of Intesa SanPaolo’s financial fundamentals. A stronger or prolonged deterioration in the retail and commercial banking divisions, or a meaningful deterioration of the C&IB (Corporate & Investment banking) lending book could all contribute to a negative impact on the Bank’s ratings.

In DBRS’ view, Intesa San Paolo maintains a solid competitive advantage domestically and the strategic and commercial actions outlined in the 2014-2017 Business Plan should position the Bank to capture new growth opportunities, especially if the Italian economy gains momentum.

Intesa SanPaolo’s broad business mix and product offering has allowed the Bank to report improving revenues, even in a challenging environment. The bank has a solid track record for increasing commission & fee income, and despite the ongoing deleveraging and a prolonged low interest environment, ISP has been able to reverse the previous year-on-year downward trend in net interest income during 1H14. In DBRS’ view, the Bank’s costs continue to be proactively managed with the cost-income ratio improved to 54% in 1H14, according to DBRS calculation. Nonetheless, the bank’s earnings capacity remains pressured by high credit losses due to the still challenging economic environment Italy.

Intesa SanPaolo’s total impaired lending increased to circa 17% of total gross loans in 1H14 from 15% at year-end 2013. Most affected sectors were commercial real estate and domestic oriented small and medium sized-enterprises as result of the prolonged recession. Deterioration has also impacted the International retail business due to rising geopolitical risks, as well as weaker economic performance in some CEE and CIS countries. Other extraordinary circumstances, including the government burden on the banking system in Hungary, have contributed to affect credit performance abroad. More positively, asset quality deterioration has been slower in 1H14. Total net inflows of new impaired loans from performing loans decreased to EUR 4.1 billion (-9% vs. 1H13). Like its Italian peers, however, Intesa San Paolo has faced difficulty in reducing the stockpile of impaired lending which has accumulated on the balance sheet.

In preparation for the European Central Bank (ECB) Asset Quality Review (AQR) and European Banking Authority (EBA) stress tests, Intesa SanPaolo has improved its cash provision coverage rate across all impaired categories towards the pre-crisis levels. Total coverage for impaired loans, and the specific coverage for bad debts (sofferenze) increased to 47% and 63% respectively in 1H14, which are significantly above the average for the Italian peers and in line with the main European peers.

DBRS views Intesa SanPaolo’s funding profile as strong, reflecting the Bank’s deep retail funding base and limited reliance on wholesale funding. Although the Bank’s access to the international funding market has remained stronger than Italian peers, even during the crisis, the Bank has continued to reduce its reliance on wholesale funding by de-leveraging and increasing its retail base. Likewise, Intesa SanPaolo has repaid in full its EUR 36 billion Long Term Refinancing Operation (LTRO) borrowings in 2013. With EUR 82 billion of unencumbered assets, the Group has significant excess liquidity coverage over its bonds’ maturities.

In DBRS view, the bank’s capital position is strong. At June 2014, Intesa SanPaolo reported a Common Equity Tier 1 (CET 1) ratio of 13.2% (or 12.9% on a fully basis) which compares favorably with the average of the Italian and European peers. Given the provisions taken in 2013 and the increase in coverage ratios, DBRS considers the Bank is well-positioned with regards to the ECB AQR and EBA stress tests.

Concurrently, DBRS has also confirmed the following ratings: A (low) for the Issuer Rating, A (low) for ISP’s Medium-Term Notes, BBB (high) for the Group’s Mandatory Pay Subordinated Debt and Cumulative Discretionary Pay Subordinated Debt, BBB for the Bank’s Non-Cumulative Discretionary Pay Subordinated Debt, and BBB (low) for the Preference Shares of the Bank. The trend remains Negative on all of the ratings. DBRS has also withdrawn the A (low) rating for the government backed securities issued by Intesa SanPaolo following their cancellation.

Notes:
All figures in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include company documents 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.