DBRS Confirms BBB (low) Rating for BPVI, Trend Negative

DBRS Ratings Limited (DBRS) has today confirmed its ratings for Banca Popolare di Vicenza (BPVI or the Bank). The 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). Concurrently, DBRS maintained an Intrinsic Assessment (IA) to the Group of BBB (low) and a support assessment of SA-3. The Trend on both ratings is negative.

The IA of BBB (low) is underpinned by BPVI’s solid market position in its retail and SME franchise across many of the principal industrial regions of Northeastern Italy. BPVI’s IA also incorporates the expansion of the shareholder base together with the improvement of the bank’s funding profile. Conversely, The IA considers the Bank’s high level of deteriorated assets and need to strengthen the Bank’s provisioning levels which add pressure to the Banks’ earnings capacity and capitalisation.

Given BPVI’s position as 9th largest bank within the Italian fragmented banking system, DBRS does not incorporate the expectation of timely support for BPVI in the event of a highly stressed scenario. As such, DBRS has assigned an SA-3 support designation which does not provide upward rating support for the IA. The final rating for BPVI of BBB (low) is thus equal to the IA.

DBRS does not expect any near term positive rating dynamic for BPVI. The negative Trend assigned to the rating principally reflects DBRS’s expectation that credit costs will remain elevated as a result of the still fragile economic environment in Italy, together with the Banks’ modest coverage ratios and increased regulatory scrutiny from the ECB. In particular, materially higher credit provisioning and the possible negative impact on capitalization and franchise could contribute to higher negative rating pressure.

In common with Italian peers, BPVI’s earnings have been impacted by weak economic conditions and the low interest rate environment. The Bank reported a small profit for 1H14 of EUR 22 million, which reflected the repayment of LTRO funding and lower levels of carry trade earnings, as well as higher sustainable Net Interest and Fee & Commission income from core activities. Nonetheless, DBRS expects that elevated provisioning during 2H14, linked to weak credit quality and shortfalls identified via the Comprehensive Assessment (CA) of the European Central Bank (ECB), could contribute to a meaningful loss for the full year. As of 1H14, BPVI reported a total impaired lending ratio of 18.7% of gross loans, up from 16.6% at year-end 2013, as well as modest total coverage ratio of 27.8% (or 31.3% including write-offs) which is partially mitigated by collateral values. More positively, DBRS notes that overall funding at BPVI has improved somewhat, reflected in the LTRO repayment, lower levels of repo funding and the maintenance of adequate liquidity buffers.

In terms of capital, BPVI completed a EUR 608 million capital increase in August 2014 which expanded its capital base to more than 100,000 shareholders. Nonetheless, DBRS notes that the Bank failed the ECB CA stress test (adverse scenario) with a shortfall of EUR 223 million. This will be fully covered by the Bank’s commitment to convert EUR 253 million in convertible bonds into equity in 2015. However, in DBRS’ view, weak earnings for full year 2014 will add to capital pressure for the Bank. Possible mitigants include the eventual approval by the ECB of BPVI’s advanced internal ratings-based models (AIRB), as well as further capital increases.

Notes:
All figures in Euros (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 Assessment 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 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.

Lead Analyst: Peter Burbank
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: December 18, 2013
Most Recent Rating Update: December 18, 2013

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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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