DBRS Assigns First-time Ratings to Banco BPM at BBB (low), Stable

DBRS Ratings Limited (DBRS) has assigned new ratings to Banco BPM SpA (Banco BPM or the Group), including an Issuer Rating of BBB (low). This follows the merger of Banco Popolare and Banca Popolare di Milano as of January 1, 2017 and the transfer of all assets and liabilities to the new legal entity Banco BPM. At the same time DBRS has withdrawn its existing ratings of Banco Popolare, including its BBB (low) Issuer rating.

The ratings assigned to Banco BPM include a BBB (low) Issuer Rating, Senior Long-Term Debt & Deposit rating of BBB (low), Short-Term Debt & Deposit rating of R-2 (middle), and Long and Short Term Critical Obligations Ratings of BBB (high) / R-1 (low). All ratings have a Stable trend. The Intrinsic Assessment of the Group is BBB (low). The support assessment is SA3, implying no uplift from systemic support.

The merger was announced in March 2016 and received final approval in October 2016. A regulatory condition for the merger was a EUR 1 billion capital increase, which Banco Popolare completed in June 2016.

The ratings of the new entity reflect the Group’s leading position across some of the wealthiest regions of Northern Italy, the stable funding profile as well as the improved capitalisation. The ratings also reflect the Group’s weak risk profile which is evidenced by the large stock of non-performing loans (NPLs) which compares unfavorably with the Euopean and Italian peer group, as well as weak profitability. The Stable trend reflects DBRS’ view that the Group remains committed to achieve the targets set in the new business plan announced in May 2016. In particular the Group is targeting to reduce its large stock of NPLs by roughly EUR 8 billion, with nominal and net NPL ratios expected at 18% and 11%, respectively, in 2019. In addition, the Group expects to deliver pre-tax synergies of approximately EUR 460 million per year fully phased from 2019.

Concurrently, DBRS has today assigned new ratings to three debt instruments which were originally issued by Banca Popolare di Milano and subsequently transferred to the Group. These include: (i) a BBB (low) rating on the EUR 500 million Senior notes (ISIN XS1024830819), (ii) a BB (high) rating to the EUR 475 million Mandatory Pay Subordinated Debt in the form of Tier 2 notes (ISIN XS0597182665), (iii) a B rating to the EUR 300 million Perpetual Subordinated notes (ISIN XS0372300227). All ratings have a Stable trend.

The notching approach for the Group’s Tier 2 and Perpetual Subordinated notes is in line with DBRS’ methodology for Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. The rating of the Perpetual Subordinated notes is five notches below the Group’s Intrinsic Assessment, taking into consideration the 5% Capital Deficiency Event threshold set in the Bank’s prospectus dated June 24, 2008 as well as the Group’s high stock of NPLs which elevates the risk of such a capital deficiency event in the current economic and regulatory environment.

RATING DRIVERS
Upward rating pressure to Banco BPM’s ratings would require a reduction in the NPL stock as well as a successful post merger integration. On the other hand, downward pressure would likely be driven by a deterioration in the Group’s franchise and/or financial position.

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: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings

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