DBRS Confirms Banco Popolare ratings following capital announcement; Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the ratings of 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 remains Stable. Concurrently, DBRS confirmed the Bank’s Intrinsic Assessment (IA) at BBB (low) and the support assessment of SA3.

The rating confirmation follows Banco Popolare’s announcement on March 23rd 2016 that it will carry out a capital increase of EUR 1 billion as part of a memorandum of understanding (MOU) to merge with Banca Popolare di Milano. In DBRS’ view, the capital increase will help Banco Popolare to improve its risk profile via higher provisioning levels and lower stock of net non-performing loans (NPLs). In addition, the merger with Banca Popolare di Milano should strengthen the Bank’s franchise and ability to generate synergies in the future. Nevertheless, the new Group will remain challenged by the high stock of NPLs. Other challenges include the execution risks linked to post-merger integration.

A successful completion of the merger together with further improvements in asset quality could contribute to positive rating pressure in the medium-term. On the other hand, any reversal in the more recent asset quality stabilisation, or failure to complete the planned capital raising could contribute to negative pressure on the ratings.

Subject to Banco Popolare’s shareholders approval, the proceeds from the capital increase are expected to strengthen Banco Popolare’s coverage for impaired loans in line with the Bank’s main peers. The capital increase is supported by a pre-underwriting agreement with two leading financial institutions and is expected to be completed by October 2016. Successful completion of the capital plan is a pre-condition for the merger with Banca Popolare di Milano, in line with the ECB’s recommendation. The merger plan will be subject to approval by the relevant authorities and by the banks' EGMs by October 2016.

The merger of Banco Popolare (EUR 121 billion in total assets at year-end 2015) and Banca Popolare di Milano (EUR 50 billion) would contribute to the creation of Italy’s third largest bank by total assets and number of branches, and provides upside potential for the enlarged Group’s franchise and earnings.

The new Group would have a leading market position across the country’s wealthiest regions, in particular Lombardy (1st with 15.5% market share for branches), Veneto (3rd – 9.5%) and Piedmont (3rd – 12.5%), and is expected to generate total synergies of EUR 1.9 billion, net of integrations costs and taxes. Cost synergies should result from branch rationalisation, digitalisation, as well as IT and other administrative simplification, whereas revenue synergies are expected from lower funding costs, expansion of product offering and enhanced distribution capabilities.

In terms of asset quality, the pro-forma Group’s impaired ratio would be approximately 22% of combined gross loans, taking into account Banco Popolare’s ratio of 24% and Banca Popolare Milano’s ratio of 16% at year-end 2015. The total coverage ratio would be close to 44% (including write-offs), however DBRS would expect this to improve to around 48% after the completion of the EUR 1 billion capital increase. Further strengthening in provisions should also encourage future NPL disposals.

DBRS expects the Group’s liquidity and capital positions to be adequate. The pro-forma CET1 ratio, fully loaded, is expected to be 12.3%, including the increase in capital and provisioning levels, which compares well with the average for the main domestic and European peers. Future improvements in the Group’s capital position and ratios could also result from asset disposal, as well as adoption of the advanced models at Banca Popolare di Milano.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016). These 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’ 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: December 15, 2014
Most Recent Rating Update: December 15, 2015

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