DBRS Downgrades Banca Monte dei Paschi di Siena’s Senior Ratings to BB; Trend Negative

DBRS Ratings Limited (DBRS) has today lowered its Senior Long-Term Debt & Deposit ratings on Banca Monte dei Paschi di Siena SpA (BMPS or the Bank) to BB from BB (high). The trend remains Negative. The Short-Term Debt & Deposit Rating was changed to R-4 from R-3, Stable trend. Concurrently, DBRS lowered the Bank’s Intrinsic Assessment (IA) to BB from BB (high), while the support assessment was confirmed at SA3. BMPS’ Critical Obligation Ratings were also downgraded by one notch. DBRS’ rating actions are detailed in the table at the end of this press release.

Today’s downgrade takes into consideration the Bank’s weak asset quality together with its modest levels of profitability and capital, as well as the deterioration in BMPS’ funding position following deposit outflows in 1Q 2016. The Negative trend reflects DBRS’ expectation that weak asset quality and the high cost of credit will continue to weigh on the Bank’s financial position.

BMPS is mid-way through its 2015-2018 restructuring plan. Despite the progress made in reducing costs and improving liquidity and capital levels, the Bank remains challenged by its high stock of Non-Performing Loans (NPLs). Improvements in asset quality remain critical to strengthen the Bank’s standalone financial strength or eventually maximise the success of a potential merger combination in line with the ECB’s recommendation.

Although the pace of deterioration has slowed, BMPS’ asset quality continues to weaken. Total net NPLs increased to EUR 24.1 billion in 1Q 2016 amounting to 21.2% of BMPS’ total loans or 285% of the Bank’s total CET1 capital at March 2016. These levels compare unfavorably with the average of BMPS’ domestic and international peers.

The Bank’s weak risk profile also had a negative effect on depositor confidence in 1Q 2016. BMPS’ total stock of deposits fell to EUR 65 billion at March 2016 (down EUR 4 billion or -6% versus year-end 2015) mainly as a result of outflows from SME and corporate customers. As a result, the Bank’s commercial funding was temporarily replaced by repos which, however, contributed to a reduction in the Bank’s liquidity buffer. Despite the deterioration, the Bank’s liquidity position remains acceptable with total unencumbered assets of EUR 19 billion (or 10.6% of total assets) and LCR of 151% at end-March 2016.

According to management’s indications, the Bank aims to accelerate the process of NPL disposals and increase the current business target of EUR 1 billion disposals in 2016. This acceleration follows the disposal of EUR 2 billion NPLs in 2015. Concurrently, the Bank is exploring potential partnerships to improve the NPL workout process and recovery rates. Nevertheless, in DBRS’ view, a material reduction in BMPS’ NPL stock is constrained by the Bank’s modest earnings and capital buffer. Potential support for future NPL disposals might result from the newly created Atlante fund, as well as the government guarantee scheme (GACS).

BMPS’ capital buffer narrowed in 1Q 2016 due to the increase in RWAs linked to higher lending volumes and phased-in deductions. As of March 2016, the Bank’s CET1 ratio decreased to 11.7% (11.4% fully loaded) from 12.0% at year-end 2015 (11.7% fully loaded), which provides a modest buffer over the ECB’s SREP minimum requirement of 10.2% (10.75% from December 2016).

RATING DRIVERS
A significant improvement in BMPS’ asset quality supported by adequate capital levels could contribute to a change in the trend to Stable. Conversely, negative rating implications could result from any further deterioration in BMPS’ asset quality, capital and customer franchise.

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 can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports, company presentations 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: January 18, 2013
Most Recent Rating Update: September 29, 2015

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