DBRS Downgrades Banca Popolare di Vicenza’s Senior Ratings to B (high); Stable Trend

DBRS Ratings Limited (DBRS) has today lowered Banca Popolare di Vicenza SpA’s (BPVI or the Bank) Senior Long-Term Debt & Deposit Rating to B (high) from BB (low) and confirmed its Short-Term Debt & Deposit Rating at R-4. Concurrently, the Bank’s Intrinsic Assessment (IA) was downgraded to B (high) from BB (low), while the support assessment was confirmed at SA3. The trend on all ratings is Stable. Today’s rating action concludes the rating review with negative implications which commenced on February 19, 2016.

The downgrade takes into consideration the increasing litigation and operational risks following the results of the investigations from Consob, as well as the further deterioration of BPVI’s franchise and funding position since DBRS’ latest review in February 2016. The Stable trend reflects DBRS’ expectation that following the recent capital increase, BPVI will now be in a better position to stabilise its customer franchise and address the ongoing asset quality challenges.

On May 4, 2016, BPVI was able to complete a EUR 1.5 billion capital increase thanks to the intervention of the newly created Atlante fund, which bought BPVI’s shares following the failure of the Bank’s IPO. In DBRS’ view, the unsuccessful market listing reflected BPVI’s weakened reputation and franchise, outstanding litigation risks and sizeable stock of non-performing loans (NPLs).

BPVI’s franchise and reputation have deteriorated following the inspections from the ECB and Consob in 2015 and 2016, which uncovered loans granted to clients to buy the Bank’s own shares, as well as a number of irregularities in the Bank’s market and commercial practices, including compliance with MiFID regulations and financial intermediation. In addition, some former members of the Bank’s management team and board of directors were placed under investigation by the Italian Public Prosecutor Offices.

In light of the critical issues identified by the Supervisory Authorities in cooperation with the Bank’s new management team, the number of claims and disputes with BPVI’s clients increased to 4,752 at March 2016 (3,045 at December 2015). As a result, the Bank’s estimate of its litigation risks related to BPVI’s shares increased to EUR 1 billion from 621 million at December 2015. Despite the provisions taken in 2015, DBRS believes that the ongoing and future litigation risks are likely to weigh on the Bank’s financial position.

DBRS expects BPVI to remain loss making in 2016. This view considers the credit costs linked to the Bank’s high stock of net NPLs (amounting to EUR 5.3 billion or 21% of the total net loans), the growing litigation risks and restructuring costs, as well as deleveraging and lower revenues.

BPVI’s funding and liquidity position deteriorated following major deposit outflows in 2015. Total funding (net of repos) decreased by EUR 6.7 billion (or -23% year-on-year) to EUR 21.9 billion at December 2015, whereas the total Liquidity Coverage Ratio fell below the minimum regulatory requirement. Deposits outflows from retail and corporate customers continued in 1Q 2016 mainly as a result of the uncertainty over the Bank’s IPO and capital increase. More recently, BPVI’s liquidity position improved following the Bank’s capital increase and some deleveraging. As a result, both LCR and NSFR improved above the minimum regulatory thresholds, according to management indications. Despite that, in DBRS’ view, sustained improvements in the Bank’s funding and liquidity position will require significant progress in the Bank’s risk profile and reputation.

The Bank’s capital position has improved following the EUR 1.5 billion capital increase subscribed by the Atlante fund, which now owns 99.33% of BPVI’s shares. Incorporating the capital raise, BPVI’s pro-forma CET1 ratio at year-end 2015 improved to 12.8% from 6.65%, which compares with the 10.25% minimum set by the ECB under the SREP process in November 2015. In DBRS’ view, BPVI’s ability to maintain adequate capital levels will depend on the future progress of the restructuring plan, as well as commitment from the Bank’s new shareholder.

RATING DRIVERS
A significant improvement in BPVI’s franchise, risk profile and funding could contribute to positive rating pressure. Conversely, negative rating implications could result from any further deterioration in BPVI’s customer franchise and legal risks.

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) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company 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: December 18, 2013
Most Recent Rating Update: February 19, 2016

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