DBRS Confirms Banca Popolare dell’Alto Adige at BBB (low); Trend Remains Negative

DBRS Ratings Limited (DBRS) has today confirmed its ratings on Banca Popolare dell'Alto Adige Scpa (BPAA or the Bank). These include the Senior Long-Term Debt and Deposit rating of BBB (low), as well as the Short-Term Debt & Deposit rating of R-2 (middle). 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 profile and improved capital position, as well as progress with the post-acquisition integration of the former Banca Popolare di Marostica Group (BPM). On the other hand, the current rating level also takes into account BPAA’s modest profitability and weak asset quality profile. The Negative trend reflects the high credit and integration costs linked to the merger of BPM and the possibility that this will pressure BPAA’s profitability in 2016.

In 2015, BPAA merged with BPM, a small mutual bank based in the region of Veneto. As part of the integration process in 2015, Banca di Treviso SpA was incorporated into BPAA, whereas BPM’s systems were integrated into BPAA’s IT platform. According to BPAA’s business plan for 2016-2020, future integration steps include the implementation of the Hub & Spoke model across BPM’s branch network, as well as further investments to strengthen the Bank’s risk management structure and commercial strategy. In addition, as mutual bank with total assets above EUR 8 billion, BPAA will need to transform into joint-stock company by year-end (YE) 2016.

In DBRS’ view, BPAA’s profitability is constrained by the costs linked to the acquisition of BPM and modest revenues due to the Bank’s high reliance on net interest income. BPAA’s results for 2015, however, were supported by one-off profits from asset disposal, as well as lower credit provisions. As a result, BPAA’s net income increased to EUR 22 million in 2015 from EUR 3 million in 2014, including the results of BPM Group. Despite the improvement in 2015, DBRS expects BPAA’s results to remain modest in 2016 driven by high cost of credit and integration costs.

BPAA’s asset quality has deteriorated with the acquisition of BPM. The Bank’s gross impaired ratio increased to 15.2% of the BPAA’s total gross loan at YE 2015 from 9.1% in 2014. With a net impaired ratio of 9.7% and total coverage ratio of 40.1%, the Bank’s asset quality profile remains in line with the average for the Italian small banks. Nonetheless, the Bank’s coverage ratio for bad loans or “sofferenze” at 51% is lower than the peer average of 62% at YE 2015.

In DBRS’ view, BPAA’s funding and liquidity positions remain adequate. The Bank’s funding profile is underpinned by its stable retail base. As of June 07, 2016, the Bank’s total unencumbered ECB eligible assets stood at EUR 881 million (or 10% of BPAA’s total assets) which provide a solid buffer over future bond redemptions.

BPAA’s capital position strengthened following the EUR 96 million capital increase completed in January 2016. As a result, the Bank’s pro-forma CET1 and total capital ratios improved to 12.8% at YE 2015 from 11.2%, which provides a buffer of approximately EUR 145 million over the 10.3% minimum total capital ratio set by the Bank of Italy under the SREP process. Nevertheless, the Bank’s capital ratios remain below the pre-acquisition levels. DBRS expects BPAA’s future total capital position to improve via a combination of retained earnings and potential Tier 2 issuance.

RATING DRIVERS
A stabilisation in credit costs, together with further progress on the integration could lead to a change in the trend to Stable. Downward rating pressure could result from a further weakening of BPAA’s asset quality profile, or if the Bank is unable to successfully manage its legal transformation.

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: February 18, 2014
Most Recent Rating Update: June 17, 2015

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