DBRS Confirms Banco Popolare Rating at BBB (low); Changes Trend to Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings for Banco Popolare Societa’ Cooperativa (Banco Popolare or the Bank) including the Senior Long-Term Debt and Deposit Rating at BBB (low) and the Short Term Debt and Deposit Rating at R-2 (middle). The trend on both ratings has been changed to Stable from Negative. Concurrently, DBRS confirmed the Bank’s Intrinsic Assessment (IA) at BBB (low) and the support assessment of SA3. As a result, the Bank’s final ratings are positioned in line with its IA.

The rating confirmation reflects Banco Popolare’s stable franchise across some of the wealthiest regions of Northern Italy, as well as the Bank’s improved earnings generation and the stabilising asset quality. However, the IA continues to reflect Banco Popolare’s large stock of net impaired loans, as well as the Bank’s high exposure to ECB funding.

The change in the trend to Stable, from Negative, reflects DBRS’ expectation that Banco Popolare will maintain an adequate level of profitability in 2016, together with further improvements in asset quality. Although DBRS views upward rating movement as unlikely at present, a meaningful improvement in Banco Popolare’s asset quality could contribute to positive rating pressure. 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 in Banco Popolare’s profitability, liquidity or capital position.

In DBRS’ view, Banco Popolare benefits from a large and diversified franchise with solid market shares across some of the wealthiest regions of Northern Italy. In 2015, the Bank has continued to make progress in implementing its restructuring plan, including improvements in risk management, as well as the Group’s simplification via a reduction in total headcount, and asset disposals. For 2016, the Bank is expected to transform into a joint-stock company. In DBRS’ view, the legal shift is likely to promote further improvements in corporate governance and efficiency, as well as strengthen the Bank’s ability to raise capital and/or participate in possible consolidation.

Banco Popolare’s performance improved during 2015. After 4 years of consecutive losses, the Bank is expected to return to profit for the full-year. Although credit costs remain high in DBRS’ view, they have reduced significantly, helping the Bank to report net profit of EUR 350 million for 9M 2015, compared to a loss of EUR 122 million for 9M 2014. Going forward, further improvement in commission income, and in cost efficiency, will be needed to offset ongoing pressure on the net interest margin given the low interest rate environment and increased market competition.

Banco Popolare’s asset quality began to stabilise during 2015 as a result of lower levels of inflows into impaired loans. At September 2015, the Bank reported a total gross impaired ratio of 24.8%, in line with the level registered at December 2014 (24.7%). Moreover, in October 2015, the Bank sold a portfolio of unsecured bad loans for a nominal value of approximately EUR 950 million.

In conjunction with the European AQR, the Bank’s provisioning levels were strengthened to a more adequate level, with the total coverage ratio increasing to 34% (or 45% including write-offs) at end-September 2015, from 27% (or 38%) as of end-September 2014. Despite these improvements, Banco Popolare’s stock of net impaired loans remains high (EUR 14 billion corresponding to approximately 241% of the Bank’s CET 1 capital at end-September 2015).

Banco Popolare’s funding profile is underpinned by its solid retail base, which contributed approximately 70% of the Bank’s total balance sheet funding at end-September 2015. In addition, the Bank has continued to rely on access to ECB based funding sources. With EUR 14.5 billion in total unencumbered assets at end-October 2015, the Bank maintains an adequate liquidity buffer for future bond maturities.

The Bank’s capitalisation has strengthened to a more adequate level. At end-September 2015, Banco Popolare reported a Common Equity Tier 1 (CET1) ratio of 12.7% (or 12.2% Basel III fully loaded), up from 11.9% at end-2014, which provides an adequate buffer over the 9.55% minimum threshold set by the ECB under the SREP process in November 2015. In DBRS’ view, improvement in the Bank’s earnings generation capacity together with further asset disposals will be critical to maintain the Bank’s capital position in 2016, and to provide the ability to meet the increased regulatory hurdles in the future.

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: Roger Lister
Initial Rating Date: December 15, 2014
Most Recent Rating Update: September 29, 2015

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