DBRS Confirms Unione di Banche Italiane at BBB (high); Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Unione di Banche Italiane SpA (UBI or the Bank), including the Senior Long-Term Debt & Deposit rating of BBB (high) and the Short-Term Debt & Deposit rating of R-1 (low). Today’s rating action follows a periodic review of UBI’s performance and includes the liabilities as detailed in the table at the end of the press release. The trend on all the ratings remains Stable. Concurrently, DBRS confirmed the Bank’s Intrinsic Assessment at BBB (high) and Support Assessment at SA3.

The confirmation of the ratings reflects the Bank’s stable franchise across some of the wealthiest regions in Northern Italy, as well as its adequate funding and liquidity positions. Conversely, the ratings take into consideration the Bank’s high stock of non-performing loans (NPLs) and modest provisioning levels which continue to weigh on UBI’s profitability and capital buffers. In addition, the ratings consider the difficult operating environment in Italy, ongoing pressure on the banking sector and a more stringent regulatory environment.

The Bank’s ratings also take into account the steps taken by the Bank in 2016 to reduce organisational complexity, as well as improve productivity and risk profile, together with DBRS’ expectation that UBI remains committed to further actions to strengthen its financial profile. In particular, as part of the Bank’s recently announced business plan, UBI is targeting the following: 1) streamline the Bank’s operating and legal structure, 2) improve the revenue mix by expanding the Bank’s fee-based activities, 3) reduce the stock of NPLs while also strengthening the provisioning coverage in line with the average for the peer group, 4) reduce the exposure to the Italian government bonds.

The Bank’s profitability deteriorated in 2016, reflecting pressure on margins, restructuring costs linked to the implementation of the business plan and high loan loss provisions. For 9M 2016, the Bank reported a net loss of EUR 755 million, mainly driven by EUR 323 million in one-off redundancy costs, as well as EUR 851 million in credit provisions already deducted from the Bank’s regulatory capital. In parallel, core revenues remained subdued with lower net interest income only partially offset by higher fee and commission income.

The Bank’s risk profile is impacted by a large stock of NPLs. At September 2016, UBI reported a gross NPL ratio of 15.2% which compares unfavourably with the European average. The Bank’s gross NPLs decreased slightly in 2016 mainly as a result of lower inflows from performing loans. On a net basis, total NPLs reduced to EUR 8.3 billion from EUR 9.9 billion in 3Q 2015 on the back of higher provisioning levels. At September 2016, UBI’s total NPL coverage strengthened to 37% (45%, including write-offs) from 28% (37%) in the same period of 2015. Nevertheless, the Bank’s coverage levels remain below the average for the peer group. According to the business plan, UBI expects to reduce the stock of gross NPLs to approximately EUR 11 billion at year-end 2020 mainly as a result of higher recovery rates. In parallel, the Bank’s coverage levels are expected to improve towards the domestic market average by the end of the plan. In DBRS’ view, the Bank’s NPL reduction plans may prove challenging if not supported by an improvement in the Italian operating environment or significant NPL disposals.

UBI has a solid funding profile which is underpinned by the Bank’s large retail funding base, as well as adequate access to the wholesale funding markets. For the medium-long term, the Bank expects to reduce its large exposure to retail bonds by partially shifting into wholesale funding sources. With EUR 17 billion in total unencumbered assets at September 2016 (approximately 14.6% of the total asset), the Bank maintains a sizable liquidity buffer for future bond maturities.

The Bank’s capital buffers deteriorated in 2016. UBI’s fully loaded CET1 ratio fell to 11.3% at September 2016, from 12.6% at September 2015 as a result of the reported loss as well as an increase in RWAs. DBRS notes that the Bank’s fully loaded CET1 ratio improved by 30 bps thanks to the repurchase of minority interests in November 2016, while in the medium term additional 40 bps are expected from the recognition of DTAs. Nonetheless, in DBRS’ view, UBI’s capital position remains vulnerable to potential further increases in provisioning levels.

RATING DRIVERS
Although DBRS views positive rating pressure as limited in the short term, a significant improvement in the Bank’s profitability, risk profile and capital position could contribute to positive rating pressure in the medium term. Conversely, negative rating implications could result from any reversal in the current trend of asset quality improvement, or delay in successfully implementing the business plan. A material deterioration in the Bank’s financial fundamentals resulting from potential acquisitions or further pressure on the Italian banking sector could also contribute to negative pressure.

Notes:
All figures are in Euros 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), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), Critical Obligations 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 documents and SNL Financial. 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

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, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Head of EU FIG, Global FIG
Initial Rating Date: 25 November 2015
Most Recent Rating Update: 27 April 2016

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