DBRS Confirms BBB (low) for Banca Sella Holding; Assigns BBB (low) for Banca Sella SpA; Trend Neg

DBRS Ratings Limited (DBRS) has today confirmed its ratings for Banca Sella Holding SpA (Sella, the Bank or the Group). These ratings include a Senior Long-Term Debt and Deposit Rating of BBB (low), an Issuer Rating at BBB (low) and a Short-Term Debt and Deposit Rating of R-2 (low). Concurrently, DBRS maintained an Intrinsic Assessment (IA) of BBB (low) for the Group. The support assessment of SA-3 remains unchanged and highlights DBRS’ view that the potential support for the Bank in the case of a systemic crisis is not sufficiently predictable to provide rating uplift, particularly given the Group’s small size nationally. The Trend on all ratings remains Negative.

The confirmation of Banca Sella Holding’s ratings reflects the Group’s stable market position in its core market within Piedmont, as well as its solid funding and liquidity profile and the relative diversification of its franchise. Conversely, the ratings take into account the Bank’s high cost of credit and still modest capitalisation. The Negative Trend reflects the possibility that there could be negative rating pressure if Sella does not improve its capital ratios. Upward rating pressure would require improvement in asset quality, further strengthening of the Bank’s capitalisation, as well as additional improvements in the Group’s corporate governance.

In DBRS’ view, Sella’s franchise has remained resilient, despite the still difficult economic environment in Italy. The Group maintains a leading market position for retail and commercial banking in its home province of Biella, the historical core base of the Bank’s franchise. In addition, Sella’s franchise benefits from meaningful diversification into private banking, as well as payment system activity and services.

DBRS views the Bank’s earnings capacity as modest. Nonetheless, the Bank has performed better and more consistently through the crisis than most peers and has benefitted from the relative balance of revenues and earnings from across its main activities. In 2014, the Bank’s net income doubled to EUR 70 million from EUR 35 million in 2013, mainly as a result of the trading income on the Group’s security portfolio. However, excluding the one-off impact, Sella’s core earnings for 2014 weakened as a result of higher credit costs.

The Group’s asset quality continued to deteriorate in 2014. Sella’s total gross impaired ratio increased to 15.4% from 13% in 2013 which still compares well with the average for the Italian banking system (17.7%). The higher impaired ratio for 2014 reflected the further weakening of credit dynamics across the domestic SME and real estate sectors, as well as the reclassification of some impaired assets.

In 2014 Sella has made further progress in strengthening its provisioning levels, helping to mitigate the further deterioration in the Bank’s asset quality. This was particularly relevant at Banca Sella Spa, the Group’s main operating bank, as well as at Consel, the Group’s consumer finance unit. Sella’s total coverage ratio improved to 48% at year-end 2014 from 44% in 2013 which is above the Italian banking system average of 44%. Nonetheless, DBRS notes that the Bank’s total coverage ratio remains below its pre-crisis level (55% in 2008). Further requirements for higher provisioning may result from the Bank of Italy credit quality investigation currently in progress at the Bank.

In DBRS’s view, funding and liquidity remain a key strength for Sella. The Group’s funding profile is underpinned by its solid retail base and limited reliance on wholesale market. More recently, like many Italian banks, Sella’s funding and liquidity conditions have also benefited from the easing of the Italian sovereign bonds spreads. This has helped Sella to reduce its exposure to the ECB. The Bank’s liquidity buffer appears satisfactory in DBRS view. The Group’s counterbalancing capacity improved to EUR 3 billion at March 2015 (corresponding to 21% of the total asset base), and provides a solid buffer over future maturities in 2015-2017.

The Group’s capital position improved over the past years principally from earnings retention and modest equity contributions from family owners, but further strengthening is required. At year-end 2014, Sella reported a CET 1 ratio of 8.95% which is significantly below the average of the Italian banking system (11.8%). Although further investment from the family is possible, this can be a lengthy process. In the interim, future earnings retention, as well as targeted asset disposals, remain possible capital mitigations.

In addition to confirming the existing ratings, DBRS has today assigned new ratings to the Group’s main operating bank, Banca Sella Spa. The new ratings include a Senior Long-Term Debt and Deposit Rating of BBB (low), an Issuer Rating at BBB (low) and a Short-Term Debt and Deposit Rating of R-2 (low). The trend on all ratings is Negative. The IA is also at BBB (low). Concurrently, DBRS has also assigned an SA-1 designation to Banca Sella SpA which reflects its strong integration with the parent bank and its 92.44% ownership by Banca Sella Holding Spa.

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 Assessments for Banks and Banking Organisations (March 2015) 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.

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: Nicola De Caro
Rating Committee Chair: Roger Lister
Initial Rating Date: July 7, 2014
Most Recent Rating Update: July 7, 2014

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