DBRS Downgrades BPVI to BB; Negative Trend

DBRS Ratings Limited (DBRS) has today lowered its ratings on Banca Popolare di Vicenza Scpa (BPVI or the Bank). The Senior Long-Term Debt & Deposit Rating was downgraded to BB from BBB (low), with a Negative trend, and the Short-Term Debt & Deposit Rating was lowered to R-4 from R-2 (low) with a Stable trend. Concurrently, DBRS lowered the Bank’s Intrinsic Assessment (IA) to BB from BBB (low) and confirmed the support assessment of SA-3.

Today’s rating action concludes DBRS’ review of BPVI ratings, which were placed Under Review with Negative Implications (URN) on May 15, 2015. The review was focused on the risks of a negative impact on the Bank’s financial position, reputation and franchise linked to the investigations into the Bank by both the ECB and Consob, as well the unexpected departure of the Bank’s CEO.

The downgrade follows publication of BPVI’s 1H15 results which revealed a meaningful deterioration in the Bank’s capital position. At June 2015, BPVI reported a Common Equity Tier 1 (CET1) ratio of 6.81%, sharply down from 10.44% at December 2014 and well below the 10.3% minimum threshold set by the ECB under the SREP process. In addition, the Banks’ total capital ratio of 7.63% fell below the Basel III minimum requirement of 8.00%. The deterioration emerged following the ECB’s investigation, as well as the review of the Bank’s capital position and credit book by the new CEO in Q2 2015 which led to a net loss of EUR 1,053 million and a prudential capital filter of EUR 622 million.

Together with its 1H15 results, BPVI announced that it will submit its capital plan to the ECB in September 2015. This includes a capital increase up to EUR 1.5 billion and the issuance of a Lower Tier 2 instrument for EUR 200 million. Subject to ECB validation and shareholders’ approval, the capital increase is expected to be completed by spring 2016 together with Bank’s Initial Public Offering (IPO).

The Negative trend on the Bank’s Senior Long-Term Debt & Deposit Rating takes into account the expectation that BPVI should be able to complete its capital plan. Yet, it also recognizes the additional challenges linked to pending results from the inspection by Consob, as well as further evidence and potential new results from the ongoing review of the bank’s risk profile and capital position under the new management team. Appointed in June 2015, the new CEO initiated a comprehensive review of the Bank’s organisational structure, risks and capital which is expected to be completed in 2H15.

Additional negative rating pressure could result if the Bank is unable to improve its capital position, and/or should new problems arise from the ongoing investigations or further weakening of the Bank’s fundamentals become evident. Conversely, further progress on Bank’s restructuring, IPO and capital position could contribute to a more supportive view of the rating by DBRS over the medium term.

For 1H15, BPVI posted a record loss of EUR 1,053 million which included a step increase in loan loss provisions for EUR 703 million. The higher provisioning levels in 1H15 helped to strengthen the Bank’s total coverage for impaired loans to 40% from 35% at December 2014 in line with the peer group average. Despite higher provisions, the Bank’s risk profile continued to deteriorate with net impaired lending up to EUR 4.6 billion at June 2015 (+10% vs. December 2014). The Bank’s 1H15 results also incorporated the negative impact of EUR 269 million in goodwill impairment, EUR 119 million in provisions on financial instruments, as well as EUR 340 million in provisions for risks linked to the recent audit of the Bank’s capital position.

During the period February-July 2015, the ECB conducted an inspection on BPVI’s risk management and market risk, including the evolution of the bank’s capital position in connection with the capital increases in 2013-2014. The final results of the investigation, which was completed in July, are expected by YE 2015. Nevertheless, based on preliminary indications by the ECB, the new management team identified a number of cases in which BPVI’s clients used loans granted by the bank to buy its shares. Such loans contributed to inflate the Bank’s capital position by EUR 975 million at June 2015. As a consequence, the Bank has written-off its capital position by reporting EUR 363 million in write-offs and provisions for risks, as well as a capital filter for EUR 622 million at June 2015.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria: Support Assessment 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: December 18, 2013
Most Recent Rating Update: May 15, 2015

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