DBRS Places Banca Monte dei Paschi di Siena Ratings Under Review with Negative Implications

DBRS Ratings Limited (DBRS) has today placed the ratings for Banca Monte dei Paschi di Siena SpA (BMPS or the Bank) Under Review with Negative Implications. The review includes the Senior Long-Term Debt & Deposits Rating of BB, the Short-Term Debt and Deposits Rating of R-4 and the BBB (low) / R-2 (middle) Critical Obligations Ratings. As part of the review, the Bank’s Intrinsic Assessment (IA) of BB will also be reassessed. The rating on the Notes guaranteed by the Italian Ministry of Economy and Finance is confirmed at A (low), Stable trend.

The review of the ratings reflects the additional challenges for BMPS’ capital position following the ECB’s request, disclosed on July 4 2016, to accelerate the reduction of the Bank's stock of non-performing loans (NPLs). At end-March 2016, the Bank reported an impaired ratio of 34%, which is higher than the average for BMPS’ domestic and international peers. The Bank's weak asset quality is the key challenge for the Bank’s creditworthiness, and recently DBRS lowered BMPS’ Senior Long-Term Debt & Deposits Rating to BB on 7 June 2016, with a Negative trend, to reflect this.

According to the ECB’s request, BMPS will need to reduce its NPLs by EUR 14.6 billion on a gross basis (or EUR 9.5 billion on a net basis) by 2018, targeting a gross NPL ratio of 20%, from 34.4% as of March 2016. This is approximately EUR 11.1 billion more than the EUR 3.5 billion NPL reduction target set out in BMPS’ business plan presented in May 2015.

Considering the current market price for Italian NPLs (around 20% of the gross value), as well as BMPS’ cash coverage ratios (63% for bad debt and 29% for other NPLs categories) any disposal to reach the ECB’s target would likely generate a capital shortfall for BMPS. Additional capital pressure could also arise from the European Banking Authority (EBA) 2016 stress tests, the outcome of which will be published on July 29 2016.

In DBRS’ view, support from BMPS’ shareholders is likely to be challenging in the current equity capital markets. The Bank’s share price has fallen by 76% since the beginning of the year and 22% since the publication of the letter from the ECB (market data as of July 11, 2016). In DBRS’ opinion this lack of access to external capital increases the risks for BMPS’ bondholders, especially holders of subordinated debt instruments.

During the review period, which is expected to be resolved within the next three months, DBRS will focus on the impact of the ECB request and the different sources of capital available for BMPS, as well as the possibility of burden sharing and bail-in under State Aid rules. DBRS does not rate the Bank’s subordinated debt.

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) 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

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews 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, Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: January 18, 2013
Most Recent Rating Update: June 7, 2016

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