DBRS’ Intrinsic Assessment for ISP Remains Unchanged at A (low); Snr Ratings Remain Under Review Neg

DBRS Ratings Limited (DBRS) has today maintained Intesa SanPaolo SpA’s (ISP or the Bank) Senior Long-Term Debt & Deposits rating at A (low) Under Review with Negative Implications (URN) and the Intrinsic Assessment (IA) at A (low). Today’s rating action follows a periodic review of ISP’s performance and includes the liabilities as detailed in the table at the end of the press release. Concurrently, DBRS confirmed the Bank’s Short-Term Debt and Deposits rating of R-1 (low) with Stable trend.

ISP’s Senior Long-Term Debt & Deposits rating were placed URN on August 11 following DBRS’ rating action on the Republic of Italy. On November 3, the time frame for the Sovereign rating review was extended until after the Italian constitutional referendum on December 4, 2016. Given ISP’s high exposure to Italian Sovereign bonds and concentration to the domestic banking market, DBRS considers that the Bank’s financial position and prospects are highly correlated with those of the Sovereign. The review of ISP’s long-term ratings will be concluded after the conclusion of the sovereign review.

The Bank’s IA at A (low) reflects ISP’s leading franchise in Italy, as well as its adequate liquidity and capital position. Conversely, the IA considers the Bank’s large stock of impaired loans, as well as a still challenging operating environment in Italy and the evolving and more onerous regulatory environment.

In DBRS’ view, ISP maintains a solid competitive position domestically, underpinned by the Bank’s large franchise, well diversified business model and solid customer perception. The Bank is gaining market share and customers from weaker banks and competitors which are restructuring or downsizing their business. On the other hand, ISP has also contributed to the rescue of some troubled banks to preserve the country’s financial stability. Given the still challenging banking environment in Italy, the risk of new contributions from ISP cannot be ruled out, in DBRS’ view.

Over the recent period, the Bank has made some progress in terms of revenue mix with the expansion of fee and commission income, while maintaining a solid cost control. Nonetheless, the Bank’s profitability continues to reflect pressure on margins and high cost of credit. For 9M 2016, the Bank’s net income of EUR 2.3 billion was 14% lower than the same period in 2015. Although lending volumes picked-up in 2016, the Bank’s net interest income decreased by 6% YoY mainly as a result of the low interest environment and lower contribution from the sovereign bond portfolio. The annualised cost of credit remains elevated at 93 bps, despite the lower stock of non-performing loans (NPLs), as the Bank strengthened the coverage levels for unlikely to pay and past due loans.

The Bank’s risk profile is impacted by a large stock of NPLs. This, however, began to reduce in 2015 with total gross NPLs down by 5% (EUR 3.4 billion) to EUR 59.7 billion (EUR 31 billion, net of provisions) at September 2016, from EUR 63.1 billion at YE 2015 (EUR 33 billion, net). The improvement in 2016 was supported by a combination of lower inflows, higher outflows to performing loans, write-offs and recoveries. Nevertheless, the Bank’s gross NPL ratio of 15.1% (8.5%, net) remains high by international comparison. For the medium term, the Bank expects a steady reduction of its stock of impaired loans on the back of the asset quality trends observed during 2016. At present, the Bank does not expect material NPL disposals.

ISP maintains a solid funding profile which is underpinned by the Bank’s large and growing retail funding base, as well as its adequate access to the wholesale funding markets. In 2016, the Bank’s deposit base expanded, benefitting from flight to quality. Despite a solid market perception, the Bank’s issuance volumes in the wholesale markets have been relatively low in 2016, due to the inflow of new deposits, as well as the availability of the ECB’s new TLTRO program. With EUR 76 billion in total unencumbered assets at September 2016 (approximately 10.6% of the total asset), the Bank maintains a sizable liquidity buffer for future bond maturities.

In DBRS’ view, ISP maintains an adequate capital position. As of September 2016, the Bank reported a fully loaded CET1 ratio of 13.0% which compares favorably with the average of its domestic and international peers. The Bank’s satisfactory capital position was also confirmed by the 2016 EBA stress test. Under the adverse scenario, the Bank reported a fully loaded CET1 ratio at 10.2%, which provides a buffer of approximately 71 bps or EUR 2 billion (fully loaded at September 2016) versus the SREP requirement of 9.5% set by the ECB in November 2015. The Bank paid EUR 2.4 billion of dividends in 2015 (payout out ratio at 86%) and is expected to distribute EUR 3 billion in 2016.

RATING DRIVERS
Downward pressure to ISP’s ratings would likely be driven by a downgrade of the Sovereign’s rating and/or a material deterioration of the Bank’s financial fundamentals and franchise. Although unlikely, upward rating pressure would require an improvement of the rating for the Italian Sovereign combined with a continuation of the Bank’s strengths and further improvement in asset quality.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). 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), Critical Obligation Rating Criteria (February 2016) and DBRS Criteria: Guarantees and Other Forms of Support (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’s reports and SNL Financials. DBRS considers the information available to it for the purposes of providing this rating to be 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 historical default rates published by the European Securities and Markets Authority (“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: September 19, 2013
Most Recent Rating: August 11, 2016

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.