DBRS Confirms BPAA’s ratings at BBB (low); Trend Changed to Stable
Banking OrganizationsDBRS Ratings Limited (DBRS) confirmed the ratings of Banca Popolare dell’Alto Adige - Volksbank SpA (BPAA or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). The trend on all ratings was changed to Stable, from Negative. Concurrently, DBRS maintained the Bank’s Intrinsic Assessment at BBB (low) and support assessment at SA3. A full list of rating actions is included at the end of this press release.
KEY RATING CONSIDERATIONS
The confirmation of the ratings considers the Bank’s solid market share in its home region of Trentino Alto Adige, its stable capital position and adequate liquidity profile. DBRS’ ratings also take into account BPAA’s modest profitability level and the still high stock of NPLs. The trend change to Stable considers the reduction in the stock of non-performing loans (NPLs) achieved in 2017 and the expectation that the Bank will continue to improve its asset quality profile while maintaining an adequate capital position.
RATING DRIVERS
Upward rating pressure would require a significant improvement in asset quality while maintaining current capitalisation levels. Further progress in profitability and efficiency would also be viewed positively. Negative rating pressure to BPAA’s ratings would result from (i) any reversal of the progress made in improving asset quality, or (ii) a weakening in the capital position.
RATING RATIONALE
BPAA’s franchise is small but resilient, underpinned by a solid market position in its home province of Bolzano, in the wealthy autonomous region of Trentino-Alto Adige / Südtirol. Located in the North Eastern part of Italy, the region has a resilient economy which continues to outperform the rest of Italy. The Bank’s franchise expanded with the acquisition of Banca Popolare di Marostica in 2015. This acquisition has provided geographic diversification and a stronger presence in the neighboring region of Veneto. Nevertheless, this came at a cost of a weaker balance sheet. In 2016, BPAA became a joint stock company following the reform of the “Popolari” banks in Italy and is now implementing its 2017-2021 business plan. In particular, the Bank is increasing its focus on diversifying its core revenues, via selective lending growth and increased focus on private banking, corporate & SME advisory and digital banking as well as improving its risk profile and operational efficiency.
The Bank’s profitability improved in 2017, but remains generally modest, reflecting pressure on net interest income and the still high cost of risk. In 2017, BPAA posted a net profit of EUR 24 million, up from EUR 8 million in 2016. This was mainly due to loan loss provisions decreasing by 42% YoY to EUR 52 million reflecting the additional provisions incurred in 2016 following a supervisory inspection by the Bank of Italy. Fees and commissions improved, supported by the placement of asset under management and bancassurance products. Positive developments in fees are expected to continue, given the Bank’s increasing commercial efforts in the private and corporate / SME segments. Operating expenses slightly decreased, also thanks to a reduction in branches and employees. Nonetheless, the Bank’s efficiency remained modest, with a reported cost-to-income ratio of 66% in 2017.
BPAA’s asset quality improved in 2017, due to a combination of disposals and internal workout measures. At end-2017, the Bank’s stock of gross NPLs decreased to EUR 960 million, from EUR 1.2 billion at end-2016, supported by sales of bad loans and unlikely to pay loans with a gross book value of EUR 85 million, as well as lower inflows and higher recoveries. The Bank’s gross NPL ratio improved to 12.9% at end-2017, from 16.0% at end-2016, whilst the net NPL ratio decreased to 7.8%, from 9.9%. BPAA’s total NPL cash coverage stood at 43.5%, 100bps higher than at end-2016. DBRS expects BPAA to further improve its assets quality profile as the Bank’s asset quality metrics still compare unfavorably with the European peers.
BPAA maintained an adequate funding position, thanks to its resilient deposits from retail, SME and corporate clients. In 2017 current account and time deposits increased by 9% to EUR 5.6 billion, from EUR 5.2 billion at end-2016, whilst bonds outstanding, mostly held by retail customers, decreased to EUR 945 million at end-2017, from EUR 1.1 billion. The Bank’s wholesale funding is mainly comprised of the ECB’s TLTRO 2 funds totalling EUR 1 billion. BPAA remained active in the Residential Mortgage Backed Securities (RMBS) and Asset Backed Securities (ABS) markets, with part of the notes retained by the Bank for potential refinancing operations with the European Central Bank. BPAA’s liquidity profile remained satisfactory, with a stock of unencumbered ECB eligible assets of EUR 1 billion at end-2017, and a liquidity coverage ratio (LCR) and a net stable funding ratio (NSFR) both above 100%.
BPAA’s CET1 ratio (phased-in) stood at 11.9% at end-2017, up from 11.7% at end-2016, as retained earnings more than offset the negative impact from the buyback of the shares from the shareholders who have exercised the right of withdrawal. The Bank’s Total capital ratio strengthened by approximately 190bps to 13.6%, following the issuance of Tier 2 subordinated instruments in August and October 2017 for a total consideration of EUR 105 million.
The Grid Summary Grades for Banca Popolare dell’Alto Adige SpA are as follows: Franchise Strength – Moderate; Earnings – Moderate/Weak; Risk Profile – Moderate; Funding & Liquidity – Good/Moderate; 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 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 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: February 18, 2014
Most Recent Rating Update: June 15, 2017
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