DBRS Upgrades BMPS’ Long-Term Senior Debt to B (high); Stable Trend

DBRS Ratings Limited (DBRS) upgraded the ratings of Banca Monte dei Paschi di Siena SpA’s (BMPS or the Bank) Long-Term Senior Debt and Long-Term Deposits to B (high) from B (low). The ratings on the Bank’s Short-Term Debt and Short-Term Deposits were upgraded to R-4 from R-5 and the Trend on all ratings is Stable. Concurrently, DBRS upgraded the Bank’s Intrinsic Assessment to B (high), and confirmed the Support Assessment at SA-3. Today’s rating actions follow the implementation of the burden sharing arrangements and precautionary recapitalisation of BPMS approved by the European Commission (EC) and concludes the rating review which was extended on July 11, 2017.

As part of today’s action, DBRS also downgraded the Bank’s Long-Term and Short-Term Issuer Ratings to Selective Default (SD) to reflect the burden sharing of BMPS’ junior bondholders. Although DBRS does not rate the Bank’s subordinated bonds, the rating agency viewed the mandatory conversion of the Bank’s Tier 1 and Tier 2 bonds as a distressed exchange. Subsequently, DBRS has withdrawn these Issuer Ratings.

At the same time, DBRS assigned new Long-Term and Short-Term Issuer Ratings at B (high)/R-4 with Stable Trend, to reflect the Bank’s improved capital position. In addition, DBRS confirmed BMPS’ Critical Obligations Ratings at BBB (low) / R-2 (middle) with a Stable Trend. The State Guaranteed Notes, rated BBB (high) / R-1 (low), in line with the DBRS’s ratings on the Republic of Italy, are unaffected by this action. A full list of rating actions is included at the end of this press release.

The upgrade to B (high) with a Stable Trend takes into consideration BMPS’s improved capital position following the implementation of the precautionary recapitalisation for approximately EUR 3.9 billion provided by the Italian Ministry of Economy and Finance (MEF), as well as the mandatory conversion into equity of the Tier 1 and Tier 2 bonds for a total consideration of circa EUR 4.5 billion. In upgrading the ratings, DBRS also considered BMPS’s improving risk profile following the increase in provisioning levels in Q2 2017 ahead of the planned securitisation of EUR 26 billion NPEs. The B (high) rating, however, continues to reflect the Bank’s still high stock of NPEs, fragile business profile due to the loss of commercial activity in 2016, as well as execution risks linked to the new restructuring plan.

In Q2 2017, BMPS reported pro-forma phased-in CET1 and Total capital ratios of 15.4% and 15.6%, respectively, including the benefits of the recapitalization completed in July and the incremental provisions reported in Q2. From January 1, 2018, the Bank is required to meet a CET 1 ratio of 9.44% and Total Capital ratio of 12.94% according to the ECB’s latest SREP decision.

As a result of the capital increase, the MEF became the largest shareholder of BMPS with a stake of around 52%, followed by the former holders of Tier 1/ Tier 2 notes and other shareholders. Eligible retail investors of the Bank’s 2008-2018 Upper Tier II notes, however, will be offered the option to sell their converted shares to the MEF, in exchange for senior bonds of BMPS with the same maturity, for a total estimated amount of around EUR 1.5 billion. At the end of this process, the stake owned by the MEF is expected to increase to approximately 70%. The Bank's securities are expected to be readmitted to stock exchange listing in 2H 2017.

In line with the EU State aid rules, BMPS is required to undertake a substantial restructuring plan. Key commitments include improvements in risk profile and efficiency, as well as business simplification over the period 2017-2021.

In Q2 2017, BMPS reported EUR 4 billion in additional loan loss provisions (LLPs) as part of the planned disposal of EUR 26 billion in gross bad loans to a private securitisation vehicle by June 2018 at a market valuation equal to 21% of the gross book value. As a result of higher provisions and NPE disposal, based on pro-forma data as of 1H 2017, BMPS’ total stock of gross NPEs would decrease to EUR 19.7 billion from 45.5 billion, whilst net NPEs would reduce to 10.5 billion from EUR 15.6 billion. Despite the material reduction, the Bank’s stock of NPEs remains high with pro-forma gross and net NPE ratios at 19.8% and 11.7% respectively. The Bank is also exposed to high litigation risks.

The higher LLPs contributed to a net loss of EUR 3.2 billion in 1H 2017. BMPS results were also impacted by a sharp deterioration in net interest income and commission, down by 13% and 9% YoY, mainly as a result of the Bank’s capital challenges and liquidity tensions during the second half of 2016. The Bank’s liquidity conditions eased following the issuance of EUR 11 billion of State guaranteed bonds in Q1 17, as well as improving depositor confidence in 1H 17.

According to the restructuring plan 2017-2021, BMPS expects a net profit of EUR 0.6 billion in 2019 and EUR 1.2 billion in 2021, driven by lower cost of credit in connection with a lower stock of NPEs and a lower risk profile of impaired loans, lower operating costs as a result of the closure of 600 branches and the exit of 5,500 employees by YE 2021, as well as higher revenues especially fees and commissions. While DBRS recognises the Bank’s past track record in delivering cost reductions, the required improvement in revenues and credit costs may prove challenging. DBRS’ ratings take into consideration the high level of competition facing the Bank, a still difficult operating environment in Italy, commercial restrictions set by the restructuring plan in line with the State aid rules, as well as the low interest environment and a more onerous regulatory environment.

The Grid Summary Grades for Banca Monte dei Paschi di Siena SpA are as follows: Franchise Strength – Moderate; Earnings – Weak; Risk Profile – Weak; Funding & Liquidity – Weak; Capitalisation – Weak.

RATING DRIVERS
Progress towards the restructuring targets and improved market confidence could contribute to positive rating pressure. Underperformance relative to plan, any further deterioration in the Bank’s risk profile or material weakening in capital and liquidity could contribute to negative rating pressure.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). Other applicable methodologies include the 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, the Ministry of Economy and Finance (MEF), the European Commission (EC) and the European Central Bank (ECB). 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 and US 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: January 18, 2013
Most Recent Rating Update: July 11, 2017

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