DBRS Places BPVI’s B (high)/R-4 Ratings Under Review with Negative Implications

DBRS has today placed the ratings of Banca Popolare di Vicenza SpA (BPVI or the Bank) Under Review with Negative Implications. The review includes the Bank’s Issuer Rating and Senior Long-Term Debt & Deposit Rating of B (high), and the Short-Term Debt and Deposit Rating of R-4. The rating on the State Guaranteed Notes remains unchanged at BBB (high), with a Stable trend, in line with DBRS’ rating on the Republic of Italy. DBRS does not rate the Bank’s subordinated debt.

The rating review reflects the additional risks for BPVI’s senior bondholders due to the increased uncertainty over the Bank’s capital position. On March 17, 2017, BPVI made a formal request to the Italian Ministry of Economy and Finance (MEF), the Bank of Italy and the ECB for State Aid in the form of a precautionary recapitalisation, in accordance with the Law Decree 237/2016, subsequently converted into law 15/2017. The recapitalisation would allow BPVI to improve its risk profile and merge with Veneto Banca, which is also applying for State Aid. However, at this stage, it is unclear whether BPVI is eligible for State Aid. Other aspects of the precautionary recapitalisation remain uncertain, including mechanism and timing. As a first step, DBRS expects the ECB to assess whether the Bank is solvent and to determine the size of the capital shortfall. Subsequently, the European Commission will decide whether the public support is in line with EU State Aid rules. A precautionary recapitalisation should reduce the risk of bail-in for the Bank’s senior bondholders, however holders of subordinated notes, not rated by DBRS, will likely be subject to mandatory conversion, in line with EU rules on burden sharing.

Despite the EUR 1.5 billion capital support provided by the Atlante fund in May 2016 following the failure of the Bank’s IPO, and a further capital injection of EUR 310 million between December 2016 and January 2017, BPVI’s capital position remains weak due to the high stock of non-performing loans (NPLs). At end-June 2016, the Bank reported a gross impaired loans ratio of 33.9%, which is significantly higher than the average for the Italian peers. A sale of a material amount of the Bank’s NPLs to restore BPVI’s long-term prospects would likely generate a large capital shortfall, considering the current market valuation for Italian NPLs (approximately 20% of gross value), and the Bank’s current provisioning levels (59% for bad loans, excluding write-offs, and 31% for other NPL categories, as of June 30 2016). A significant improvement in the Bank’s risk profile would be also beneficial for the planned merger with Veneto Banca.

Litigation risk linked to the mis-selling of shares in the Bank’s past capital increases represents another key issue for BPVI’s medium-term prospects. In January 2017, the Bank made an offer to compensate these shareholders. As of March 22, 2017, approx. 64% of the eligible shares accepted the settlement, against a minimum target of 80%. The deadline of the settlement, which was initially set for March 22, 2017, has been recently extended to March 28, 2017, to achieve the highest level of acceptance. A successful settlement agreement would help to reduce the risk of future lawsuits and further losses, as well as support future business activities.

During the review period, DBRS will evaluate the final outcome of the settlement, the Bank’s FY2016 results, any development of BPVI’s recapitalisation, as well as any potential negative implications for the Bank’s franchise and liquidity position linked to the ongoing uncertainty. As part of the review, DBRS will also monitor any further development in the proposed merger with Veneto Banca.

RATING DRIVERS
A failure to raise sufficient capital, as well as prolonged uncertainty over the Bank’s recapitalisation plan could contribute to downward rating pressure. Upward rating pressure is unlikely as reflected in the URN, but a sustained improvement in the Bank’s capital position and risk profile could contribute to the confirmation of the ratings.

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 2017), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), Critical Obligations Rating Criteria (February 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017). These can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents and the Ministry of Economy and Finance (MEF). 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, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG - Global FIG
Initial Rating Date: December 18, 2013
Most Recent Rating Update: February 3, 2017

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