DBRS Confirms Banca Sella Holding SpA and Banca Sella SpA at BBB (low); Stable Trend

DBRS Ratings Limited (DBRS) confirmed the Long-Term Issuer Ratings of Banca Sella Holding SpA (Sella or the Group) and its main operating subsidiary, Banca Sella SpA, at BBB (low). Concurrently, the Short-Term Issuer ratings for Banca Sella Holding and Banca Sella were confirmed at R-2 (middle). The trend on all ratings remains Stable. The support assessment is unchanged at SA3 for Banca Sella Holding SpA, and SA1 for Banca Sella SpA. The SA1 reflects Banca Sella SpA’s strong integration with the parent and its 78.84% ownership by Banca Sella Holding SpA. As a result, Banca Sella SpA and Banca Sella Holding SpA are rated by DBRS at the same level. This assessment also considers the legal status of the entities, which are both banks, as well as the operating roles that Banca Sella Holding carries out for the Group, including the management of the funding and liquidity of the Group. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings and the Stable Trend reflect the Group’s resilient and diversified franchise, improving asset quality profile, as well as solid funding and liquidity position. Nonetheless, DBRS’ ratings also incorporate the Group’s modest profitability and efficiency levels as well as the still large stock of non-performing loans (or NPLs).

RATING DRIVERS

Positive rating pressure would require (i) a continued improvement in the Group’s asset quality supported by adequate capital buffers, and (ii) an improvement in profitability levels. Negative rating implications could arise should the Group (i) face challenges in reducing NPLs, or (ii) experience a significant deterioration in capital. Any material weakening in Sella’s franchise could also contribute to negative rating pressure.

RATING RATIONALE

Banca Sella maintains a resilient franchise, underpinned by a stable market position in its home region of Piedmont, as well as a diversified business profile. The Group benefits from a growing private banking business, also supported by the recent acquisition of the Italian wealth management arm of Schroders, as well as its relevant market position in the payment system business. Furthermore, the Group is increasingly investing in digital banking and new technologies.

The Group’s profitability has been volatile in recent years. Sella reported a net profit of EUR 52.2 million in 2017, from EUR 79.6 million in 2016. However, both periods were impacted by non-recurring items, including the gains from the sale of the stake in Compagnie Financière Martin Maurel in 2017, as well as gains from the disposal of the insurance subsidiary (C.B.A. Vita) and the minority stake in Visa Europe in 2016. Excluding non-recurring items, net income improved to EUR 27.4 million, from EUR 17.8 million in 2016, on the back of higher fees and commissions and lower cost of risk. Nonetheless, the Group’s profitability remained modest, challenged by the low interest environment and modest efficiency levels.

The Group continued to make progress in reducing the stock of gross non-performing loans. At end-1Q18 Sella’s stock of gross NPLs decreased to EUR 1 billion, from EUR 1.2 billion at end-2016, on the back of disposals of approximately EUR 183 million of bad loans, as well as lower default rates and improving recoveries. In 1Q18, Sella’s total NPL cash coverage improved to 56%, from 51% at end-2016, whilst the coverage on bad loans strengthened to 67% from 62%; these also incorporate the first-time adoption of IFRS 9. Sella’s gross NPL ratio improved to approximately 11% at end-March 2018, from 14% at end-2016, whilst the net NPL ratio decreased to 5%, from 7%. Nevertheless, the Group’s asset quality metrics remain weak compared to European peers.

Sella’s funding and liquidity conditions remained solid. The Group is largely funded by deposits from retail, SME and corporate customers, whilst reliance on wholesale funding is limited and mainly comprised of the ECB’s TLTRO 2 funds and asset backed securities. At end-2017, Sella reported a stock of free eligible assets of EUR 3 billion, which compares favourably with future bond maturities. Furthermore, at end-1Q18 the Group reported a liquidity coverage ratio (LCR) of 174% and a net stable funding ratio (NSFR) of 131%.

The Group’s capital position has weakened slightly in 1Q18, mainly due to higher RWAs following increased lending volumes and the impact of IFRS 9. At end-March 2018, the Group reported a Common Equity Tier 1 (CET 1) ratio of 11.5%, from 12.2% at end-2017, and a Total capital ratio of 13.5%, down from 14.5%. These provide a satisfactory buffer over the minimum SREP requirements for 2018 set by the Bank of Italy, which include a CET1 ratio of 6.625% and a total capital requirement of 10.375%. At March 2018, Banca Sella SpA, the main operating subsidiary, reported a CET1 ratio of 14.6% and a Total capital ratio of 18.6%.

The Grid Summary Grades for Banca Sella Holding SpA are as follows: Franchise Strength – Good/Moderate; Earnings – Moderate/Weak; Risk Profile – Moderate; Funding & Liquidity – Good; Capitalisation – Moderate.

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). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports. 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: Mario Carrara, Assistant Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG - Global FIG
Initial Rating Date: July 7, 2014
Most Recent Rating Update: July 14, 2017

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