DBRS Confirms Creval at BBB (low); Trend Remains Negative

DBRS Ratings Limited (DBRS) has today confirmed its ratings on Credito Valtellinese S.c. (Creval or the Bank). These include the Senior Long-Term Debt and Deposits rating of BBB (low), as well as the Short-Term Debt & Deposits rating of R-2 (low). The trend on the ratings remains Negative. Concurrently, DBRS maintained the Bank’s Intrinsic Assessment at BBB (low) and support designation at SA3.

The confirmation of the ratings reflects the Bank’s stable funding and liquidity profile, as well as the improved capitalisation and increased focus on non-performing loan (NPL) management. On the other hand, the ratings take into account Creval’s modest profitability and high stock of NPLs. The Negative trend reflects DBRS’ expectations that Creval’s weak asset quality and the high cost of credit will continue to weigh on the Bank’s financial position.

As part of its business plan 2014-2016, Creval has implemented a number of measures to improve its risk profile and efficiency. These measures included a capital increase of EUR 400 million in 2014, asset disposals in 2015, as well as a corporate reorganisation and partnership agreements for NPL management. Additional measures to improve efficiency and reduce the high stock of NPLs are expected in 2016 together with the Bank’s legal transformation into a joint-stock company.

In DBRS’ view, the Bank’s profitability remains weak. In 2015, Creval reported a net profit of EUR 118 million after a loss of EUR 325 million in 2014 which incorporated the incremental provisions for the ECB Asset Quality Review. Creval’s net income for 2015, however, benefitted from a EUR 250 million capital gain from the disposal of its majority stake in Istituto Centrale delle Banche Popolari Italiane (ICBPI). Excluding this one-off impact, Creval would have posted a loss mainly as a result of lower net interest income and high credit provisions. Pressure on Creval’s results continued in 1Q 2016 with total operating income down by 6% quarter-on-quarter (-18% year-on-year) and cost of credit at 105 bps.

Creval’s asset quality continued to deteriorate in 2015 and 1Q 2016, although at a slower pace. At end-March 2016, the Bank reported a net impaired ratio of 17.9% and total coverage ratio of 37% which compare unfavourably with the average for the peer group. DBRS notes that Creval is increasing its focus on NPL disposals. During January-June 2016, the Bank sold approximately EUR 440 million of gross NPLs and further disposals are expected throughout 2016.

In DBRS’ view, Creval’s funding and liquidity positions remain adequate. The Bank’s funding profile is underpinned by its stable retail base and limited reliance on wholesale markets. As of March 2016, the Bank’s total unencumbered ECB eligible assets stood at EUR 4.2 billion which provide a solid buffer over future maturities in 2016-2018.

Creval’s capital position strengthened in 2015 thanks to asset disposals and a reduction in RWAs. The Bank’s phased-in CET1 ratio increased to 13.2% (or 13.4% fully loaded) in 1Q 2016 from 11.1% in 1Q 2015. Creval’s total capital ratio improved to 14.9% at March 2016 which provides a buffer of 221 bps (or EUR 340 million) over the 12.7% minimum requirement set by the Bank of Italy under the SREP process.

RATING DRIVERS
A significant improvement in Creval’s 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 Creval’s 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) 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’ 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: February 7, 2013
Most Recent Rating Update: June 18, 2015

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