DBRS Downgrades Veneto Banca to BB (low); Trend Remains Negative

DBRS Ratings Limited (DBRS) has today lowered Veneto Banca SpA’s (VB or the Bank) Senior Long-Term Debt & Deposit rating to BB (low) from BB. The trend remains Negative. The Bank’s Short-Term Debt & Deposit rating was confirmed at R-4 with a Stable trend. Concurrently, the Bank’s Intrinsic Assessment (IA) was downgraded to BB (low) from BB, while the support assessment was confirmed at SA3.

The downgrade takes into account the deterioration of Veneto Banca’s franchise, asset quality and litigation risks following a number of investigations by the supervisory authorities in 2015-2016, as well as increased liquidity and refinancing risks as a result of major deposit outflows. However, the downgrade has been limited to 1 notch, reflecting the EUR 1 billion capital raise subscribed by Atlante fund. The Negative trend reflects DBRS’ expectation that Veneto Banca’s weak asset quality and growing litigation risks will continue to weigh on the Bank’s business activities and financial position throughout 2016.

Veneto Banca’s franchise, reputation and risk profile deteriorated following the investigations by the ECB and Consob, as well as by the national supervisory authorities across Veneto Banca’s international operations, which uncovered several shortcomings in the Bank’s corporate governance. These included weak risk management and internal control systems, as well as several irregularities in the Bank’s market and commercial conduct. Some of these issues are currently being investigated by the Italian Public Prosecutor Office.

As a result of the investigations, Veneto Banca was required to take significant balance sheet adjustments and remedial actions. The implementation of stricter valuation criteria led to higher provisioning requirements and reclassifications, write-offs and goodwill impairment, as well as capital deductions to reflect loans granted to buy Veneto Banca’s shares. As part of the remedial actions, Veneto Banca completed its legal transformation into a joint-stock company in preparation for its Initial Public Offer (IPO) and capital increase of EUR 1 billion.

However, the Bank’s IPO failed in June 2016 following a very weak market response which prompted the intervention of the newly created Italian fund, Atlante. On June 30, 2016, Atlante subscribed Euro 989 million, corresponding to 97.6% of Veneto Banca’s share capital. As a first step, DBRS expects Atlante to strengthen Veneto Banca’s corporate governance and organisational structure.

Veneto Banca’s profitability continues to face significant headwinds. For full-year (FY) 2015, the Bank reported a net loss of EUR 882 million mainly as a result of higher provisions for credit risk, goodwill impairment and provisions for litigation risks. Veneto Banca’s performance remained under pressure in 1Q 2016. High credit and restructuring costs, together with lower revenues as a result of the Bank’s contingency liquidity requirements, contributed to a loss of EUR 34 million in 1Q 2016. For year-end (YE) 2016, DBRS expects Veneto Banca to remain loss making also as a result of growing litigations risks.

Veneto Banca’s risk profile is impacted by the Bank’s high stock of non-performing loans (NPLs), as well as a growing number of claims and litigation risks. Total Gross NPLs increased sharply to EUR 7.7 billion following the regulatory inspections in 2015. Veneto Banca’s total gross NPL ratio deteriorated to 30.9% in 1Q 2016 from 28.3% in 2015 and 22.3% in 2014, which includes the impact from deleveraging in customer loans. Despite the increase in provisions and coverage levels, the Bank’s net NPL ratio of 22.5% remains higher than the average for its peer group.

Total claims from Veneto Banca’s customers and shareholders increased to 2,657 at March 2016 (537 higher than in YE 2015), whereas total litigation risk is estimated at EUR 175 million, based on Veneto Banca’s internal valuations. DBRS notes that the Bank’s litigation risk is currently being evaluated by an independent appraiser, in line with the ECB recommendation. At March 2016, 37% (or EUR 64.7 million) of the total litigation risk was provisioned.

Veneto Banca’s funding and liquidity positions deteriorated in 2015-2016. Investor confidence had already weakened in 1Q 2015 following the investigation on the Bank’s former management team. Market confidence worsened in 4Q 2015 following the application of the resolution tools on four Italian banks which prompted deposit outflows from Veneto Banca’s corporate and retail customers. The Bank’s total direct funding (including repos) decreased to EUR 22.5 billion at YE 2015 (-8.6% versus YE 2014), whereas the LCR weakened to 53%, falling below the minimum requirement. Funding pressure continued in 1Q and 2Q 2016, reflecting the increased uncertainty over the Bank’s capital plan. We expect Veneto Banca’s liquidity position to benefit from the recent capital strengthening. Nevertheless, in DBRS’ view, sustained improvements in the Bank’s funding and liquidity position will require the Bank to make significant progress in improving its reputation and risk profile.

On June 30, 2016, Veneto Banca completed its capital increase of EUR 1 billion thanks to the intervention of Atlante fund. As a result, VB’s pro-forma CET1 ratio phased-in should strengthen to 11.2% from 6.9% as of March 2016, which compares with the 10.25% minimum requirement set by the ECB under the SREP process in November 2015. Nevertheless, in DBRS’ view, the Bank’s capital position remains challenged by the weak asset quality profile. Additional pressure may also result from growing litigation risks.

RATING DRIVERS
A significant improvement in Veneto Banca’s reputation, together with a stabilisation in the Bank’s funding, asset quality deterioration and litigation risks could contribute to a change in the trend to Stable. Progress towards the Bank’s business plan targets, including asset disposal, could also contribute to upward rating pressure. On the other hand, negative pressure could arise from further deterioration in the Bank’s litigation risk, capital position and liquidity.

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: May 13, 2013
Most Recent Rating Update: January 13, 2016

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