DBRS Confirms UBI Ratings Following Acquisition Announcement; Trend Revised to Negative

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 at BBB (high) and the Short Term Debt and Deposit Rating at R-1 (low). The trend on the ratings was revised to Negative from Stable. Concurrently, DBRS confirmed the Bank’s Intrinsic Assessment (IA) at BBB (high) and the support assessment of SA3. The BBB rating on the Bank’s Mandatory Pay Subordinated Debt – Tier 2 (ISIN: XS1404902535) remains Under Review with Negative Implications (URN) due to DBRS’ specific review on European subordinated debt. For more details on the rationale for the review, refer to the 13 January 2017 press release <a href="http://dbrs.com/research/304611" target="_blank">“DBRS Places Certain Sub Debt of 27 European Banking Groups Under Review With Negative Implications”</a>.

Today’s rating action follows UBI’s announcement on January 12, 2017 that it has made a binding offer to buy 100% of the share capital of three banks, Nuova Banca delle Marche, Nuova Banca dell’Etruria e del Lazio and Nuova Cassa di Risparmio di Chieti (collectively “the banks”), at a symbolic price of EUR 1. The offer, which was accepted on January 18, 2017, will be subject to regulatory approvals.

Nuova Banca delle Marche, Nuova Banca dell’Etruria e del Lazio and Nuova Cassa di Risparmio di Chieti, are three of the four banks placed under resolution by the European Commission in November 2015. Owned by the Italian Resolution Fund (the seller), the banks had total assets of EUR 23 billion at end-September 2016, corresponding to approximately 20% of UBI’s total asset base.

The confirmation of the ratings reflects DBRS’ view that the acquisition should not materially impact UBI’s risk profile and financial position, and is largely neutral for the Bank’s franchise and funding. However, the Trend has been changed to Negative from Stable. This reflects the downside risks of potential further asset quality deterioration stemming from the acquisition, as well as execution risks attached to the integration process.

DBRS expects UBI’s pro-forma (post-acquisition) gross NPL ratio as of September 2016 to remain largely flat at 15%, whilst the Bank’s common equity tier 1 (CET1) ratio, fully loaded, should remain above 11%. These ratios take into account both a capital increase, fully underwritten, of up to EUR 400 million to be completed by UBI, as well as multiple conditions to be met by the seller prior to the closing in 1H 2017. DBRS notes that UBI is entitled to withdraw its offer if these conditions are not met.

In particular, according to the purchase agreement, the seller will need to carry out a capital increase of EUR 450 million in connection with the disposal of EUR 2.2 billion in gross NPLs (mostly bad debts or “sofferenze”). As a result of this transaction, UBI will take approximately EUR 1.8 billion in gross NPLs, mainly composed of unlikely to pay loans, with minimum coverage ratios of 60% for bad debts and 28% for unlikely to pay debts. In addition, at the date of the closing, the net equity book value of the three banks will have to be at least equal to EUR 1 billion, including costs for future restructuring and charges for other risks.

In the medium-long term, the acquisition is expected to support UBI’s financial position through the absorption of negative goodwill and DTAs, as well as the implementation of the IRB models. Additional benefits should result from synergies and lower cost of credit. The combination of these factors is planned to strengthen UBI’s CET1 ratio, fully loaded, to 13.5% in 2020, from an initial target of 12.8% previously set under the Bank’s business plan announced in June 2016. Concurrently, the Bank’s Return on Tangible Equity in 2020 would improve to 12.7% from 10.6%. However despite the planned medium term benefits, DBRS expects that the ongoing high cost of credit and the integration costs will impact UBI’s results in 2017.

In DBRS’ view, the transaction is largely neutral for UBI’s franchise and funding. UBI’s total market shares would increase by approximately 1% nationwide following the acquisition of roughly EUR 14 billion in both gross loans and deposits. Geographically, the acquisition would bring approximately 931k clients, 547 branches and 5,000 employees, concentrated principally in the Central regions of Marche, Abruzzo, Tuscany and Lazio, where UBI has already market presence. However, key areas where overlap has been identified would be rationalised.

In terms of funding, the credit/deposit structure of the three banks does not display significant imbalances with a total loan to deposit ratio of circa 90% (based on deposits only). Despite the negative headline of the crisis, the banks were able to retain a large share of their funding in 2016. Depositors, however, were generally remunerated with higher rates than the market average.

RATING DRIVERS
A material deterioration in the Bank’s asset quality and capital position or weakening in UBI’s franchise and reputation could contribute to negative pressure. Negative rating implications could also result in the event of a downgrade of Italy’s Sovereign rating. Conversely, a significant improvement in UBI’s profitability, risk profile and capital position together with progress with the acquisition integration could contribute to positive rating pressure in the medium term.

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, Managing Director, Head of EU FIG - Global FIG
Initial Rating Date: November 25, 2015
Most Recent Rating Update: November 25, 2016

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