DBRS Downgrades BMPS to BBB (low); Keeps Ratings Under Review Negative

DBRS Ratings Limited (DBRS) has today lowered its ratings on Monte dei Paschi di Siena SpA (BMPS or the Bank) by one notch. The Senior Long-Term Debt & Deposit Rating was downgraded to BBB (low) from BBB, whereas the Short-Term Debt & Deposits Rating was changed to R-2 (low) from R-2 (middle). Both ratings remain Under Review with Negative Implications. Concurrently, DBRS lowered the Bank’s Intrinsic Assessment (IA) to BB (high) from BBB (low). The ratings had been placed under review on October 28, 2014 following the results of the ECB comprehensive assessment.

Today’s rating action follows publication of BMPS’ year end 2014 figures which revealed a EUR 5.3 billion loss, a meaningful increase in impaired lending levels and a further deterioration in capital. All were worse than DBRS had expected and contributed to the downgrade. The ongoing review reflects the challenges still faced by the Bank, including execution of the now larger rights issue, further possible downside on asset quality, the potential need to renegotiate the EU agreed restructuring plan, implication of possible state ownership and the pending re-election of the Board of Directors. Despite the increased transparency on asset quality and the speeding up of BMPS’ balance sheet clean-up and restructuring evident in the 4Q14 results, the balance of risks remains to the downside. Positive implications for the near term are likely limited to potential integration with a stronger partner.

Deterioration was mainly driven by incremental AQR related adjustments taken in 4Q14 by the Bank following completion of the ECB comprehensive assessment. During 4Q14, BMPS widened the scope of the portfolio subject to the ECB AQR methodology to 91% of the total loan book from 50%. This led to a steep increase in provisions and reclassifications over and above those initially reported in October 2014. As a result, the Bank took nearly EUR 7.8 billion in provisions for the full year, of which EUR 5.4 billion related to the adjustments made in 4Q14. Gross impaired loans increased by 8.5% quarter-on-quarter (QoQ) to EUR 45 billion and overall cash coverage improved to 48.9% from 41.8%. Despite higher provisions, net impaired lending remained high at EUR 23 billion, or approximately three times BMPS’ Common Equity Tier 1 (CET1) capital at year end.

Concurrently, BMPS CET1 ratio deteriorated to 8.7% at year-end 2014 from 12.8% at 3Q14 which is lower than the 10.2% CET1 transitional target required by the ECB SREP (Supervisory Review Evaluation Process). The Board of Directors will request that shareholders approve a higher than planned EUR 3 billion rights issue (increased from EUR 2.5 billion) in order to build a capital buffer. On a pro-forma phased in basis, BMPS would then achieve a CET1 ratio of 11.4%. However, on a fully loaded basis, including the repayment of remaining state aid, BMPS’ CET1 ratio would be lower at 9.7%. Moreover, DBRS notes that the Bank announced that it will pay the 2014 coupon on State Aid in shares rather than in cash as had been planned previously. DBRS expects that this should trigger partial state ownership of the Bank.

In concluding the extended review of the ratings, DBRS will evaluate the Bank’s progress in meeting the challenges outlined above. Separate to the actions above, DBRS confirmed the A (low) rating and Negative trend assigned to notes guaranteed by the Italian Ministry of Economy and Finance.

Notes:
All figures are 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 Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).These can be found can be found at: http://www.dbrs.com/about/methodologies

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

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews 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: Roger Lister
Initial Rating Date: January 18, 2013
Most Recent Rating Update: October 28, 2014

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

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

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.