DBRS Assigns BBB (high) Rating to UBI; Stable Trend

On November 25, 2015, DBRS Ratings Limited (DBRS) assigned first-time public ratings to Unione di Banche Italiane SpA (UBI or the Bank). These ratings include an Issuer Rating of BBB (high), a Senior Long-Term Debt and Deposit Rating of BBB (high) and a Short Term Debt and Deposit Rating of R-1 (low).

Concurrently, DBRS assigned an Intrinsic Assessment (IA) to the Bank of BBB (high) and a support assessment of SA3 which reflects DBRS’ view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the Bank’s final ratings are positioned in line with its IA. In addition, DBRS assigned a rating of R-1 (low) to the Short-term Debt issued by UBI Banca International and fully-guaranteed by the parent bank, UBI Banca SpA. The Trend on all ratings is Stable.

The IA of BBB (high) considers UBI’s extensive franchise across some of the wealthiest regions of Northern Italy, as well as its solid retail funding base and adequate capitalisation. Offsetting these strengths, DBRS notes the Bank’s complex federal structure is a potential negative for corporate governance. Also, although better than the Italian average, UBI’s asset quality remains weak by international standards, and the Bank’s low cash coverage and modest net interest income continue to weigh on UBI’s overall profitability.

The Stable Trend reflects DBRS’ expectation that the Bank will maintain a financial profile and franchise appropriate with the current ratings. Although DBRS views upward rating pressure as somewhat limited at present, a significant improvement in UBI’s asset quality dynamics would contribute to positive rating pressure. Likewise, further progress towards simplifying the Bank’s legal structure, which could also contribute to improved costs and corporate governance, would be positive. Factors which could contribute to negative rating pressure would include any reversal in the more recent stabilisation of asset quality deterioration, or any major weakening of UBI’s profitability, liquidity and capital position. Event risk could also arise from possible future consolidation.

UBI has a sizeable and diversified franchise with strong market share in Italy’s wealthy Northern regions, especially in Lombardy across the provinces of Bergamo and Brescia. The Bank was formed in 2007 following the merger of Banche Popolari Unite and Banca Lombarda e Piemontese which contributed to the creation of the fifth largest Italian bank. More recently, in October 2015, UBI become Italy’s first ‘Popolare’ (cooperative) bank to transform into a joint-stock company as per the mandatory law which requires the largest Popolari banks to change their official status. In DBRS’ view, the legal shift is likely to promote improved corporate governance and efficiency. In recent years, UBI has been rationalising its structure through the sale of non-core assets and via the merging of legal entities. Despite the progress thus far, the Group’s structure and corporate governance remain relatively complex.

Although positive within the context of Italian banks, DBRS views UBI’s earnings track-record as modest. De-risking, high credit costs, as well as pressure on lending margins, contributed to weigh on the Bank’s overall profitability. Albeit at modest levels, future profitably should strengthen on the back of a slight improvement in the Italian economic environment.

UBI’s risk profile is predominantly composed of lending exposures to retail, SMEs and corporate clients which together accounted for roughly 72% of the Bank’s total assets at September 2015. The risk profile also reflects UBI’s large holdings of sovereign securities (EUR 18 billion, or 16% of the Bank’s total assets). The Bank’s exposure to Italian government bonds has, however, decreased during 2015 and is expected to reduce further in the coming quarters.

The Bank’s lending book has deteriorated during the crisis. UBI’s total impaired lending ratio increased to circa 15.5% of total gross loans in 3Q 2015 compared to 8% in 2011. This still compares favourably with the average for the Italian banking system, and in DBRS’ view, UBI’s better quality reflects the large portion of the Bank’s credit exposure to the wealthy region of Lombardy (67% of the total lending book), as well as more prudent underwriting standards compared to many peers.

UBI’s total coverage for impaired loans strengthened to 27.7% (or 37.3% including write-offs) at end-September 2015, up from 26.5% at YE 2013. Nonetheless, coverage remained below the Italian market average. This, in DBRS’ view, in part reflects UBI’s higher proportion of loans backed by collateral of real estate and personal guarantees.

UBI’s funding profile is underpinned by the Bank’s solid retail base, which contributed roughly 79% of the total Bank’s balance sheet funding at September 2015. With EUR 14.6 billion of unencumbered assets as of 28th October 2015, the Group has a sizeable liquidity buffer for future bond maturities. As of September 2015, the Bank’s funding and liquidity ratios were well above the future Basel III minimum requirements.

In DBRS’ view, the Bank is well-positioned from a capital perspective. UBI’s recent improvement in regulatory ratios has been primarily achieved via de-leveraging and de-risking. At September 2015, the Bank reported a CET1 ratio phased-in at 13.0% (or fully-loaded at 12.56%) which provided an adequate buffer over the ECB SREP Minimum of 9.5% set in February 2015. DBRS expects that UBI’s improved earnings will help to offset any future increase in regulatory capital requirements, and/or any impact from shareholders’ right of withdrawal following UBI’s recent legal transformation.

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 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’s 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: Elisabeth Rudman
Initial Rating Date: November 25, 2015
Most Recent Rating Update: November 25, 2015

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