DBRS downgrades Banca Popolare Alto Adige to BBB (low), Negative Trend

DBRS Ratings Limited (DBRS) has today lowered its ratings on Banca Popolare dell’Alto Adige Scpa (BPAA or the Bank). The Bank’s Senior Long Term Debt and Deposit Rating was downgraded to BBB (low) from BBB and the Short-term Debt and Deposit Rating to R-2 (middle) from R-2 (high). The Trend on both ratings is Negative. DBRS has also lowered the Bank’s Issuer Rating and Intrinsic Assessment to BBB (low) from BBB while the support designation at SA-3 remains unchanged.

Today’s rating action takes into account the deterioration of BPAA’s asset quality and capitalization following the merger with Banca Popolare di Marostica (BPM). The Negative Trend reflects the execution risks associated to the transaction, as well as DBRS’ expectation that the cost of credit will remain elevated as a result of the ongoing asset quality deterioration at BPM. Further progress on the integration, as well as strengthening of the Bank’s capital levels could support the ratings and contribute to a Stable Trend in the future. Downward rating pressure could result from a further weakening of BPAA’s asset quality profile, or if the Bank is unable to successfully manage future integration and legal transformation.

In April 2015, BPAA merged with BPM, a cooperative bank based in Veneto with EUR 2 billion assets. In DBRS’ view, the transaction is consistent with BPAA’s strategy to expand into the North East of Italy and will strengthen the Bank’s market share in the region of Veneto. With over 55,000 new customers and 61 additional branches, BPAA becomes Veneto’s 7th largest bank by number of branches. The transaction presents limited geographical overlap and is expected to generate synergies from cross-selling, access to new markets and lower funding costs, as well as cost savings from corporate governance simplification, digitalization of BPM processes and IT consolidation.

Nonetheless, the merger poses significant financial and execution risks for Banca Popolare dell’Alto Adige which stem from BPM’s weak financial profile. At year-end 2014, BPM reported gross impaired loans for EUR 543 million, equal to 36% of the bank’s total gross impaired lending, and cost of credit at 327bps. As a result, BPAA’s pro-forma impaired ratio increases to 15% from 9% of total gross loans based on balance sheet data at YE 2014.

In 2012-2014, BPM strengthened its cash provisioning levels to reflect higher level of impaired assets and lower collateral valuation. The total cash coverage ratio improved to 45% in 2014 for the sum of all impaired lending. Despite that, provisions are expected to remain elevated throughout 2015. BPM’s asset quality continued to deteriorate during the last quarters and coverage levels for certain impaired categories remain weak relative to some peers. The combination of the high cost of credit and integration costs is likely to add pressure on BPAA’s profitability for 2015.

In addition, the transaction weakens BPAA’s capital position by roughly 160bps. The Bank’s pro-forma common equity tier 1 ratio decreased to 11.7% from 13.3% at YE 2014 reflecting BPM’s weaker capitalization, as well as the financial terms of the merger agreement.

In DBRS’ view, strengthening BPM’s risk management culture and managing customer retention will be critical factors for the merger integration to be successful. Concurrently, the now larger size poses additional challenges for BPAA. As a mutual bank with total assets above EUR 8 billion, BPAA will also need to legally transform itself into a joint stock company as per the changes mandated under the Italian law.

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 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: February 18, 2014
Most Recent Rating Update: February 18, 2014

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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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