DBRS Confirms Intesa Sanpaolo’s ratings at BBB (high)/R-1 (low); Stable Trend

DBRS Ratings Limited (DBRS) confirmed the ratings of Intesa Sanpaolo SpA (ISP or the Bank), including the Long-Term Issuer Rating of BBB (high) and the Short-Term Issuer Rating of R-1 (low). The trend on all ratings remains Stable. Concurrently, DBRS maintained the Bank’s Intrinsic Assessment at BBB (high) 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 ISP’s ratings takes into account the Bank’s leading retail and commercial banking franchise in Italy and its diversified business model, as well as progress in improving its asset quality profile. Nonetheless, the ratings continue to reflect the Bank’s still high stock of non-performing loans (NPLs) compared to ISP’s international peers, and the challenging operating environment. Given ISP’s concentration in the domestic banking market and exposure to Italian sovereign bonds, DBRS considers that the Bank is unlikely to be rated higher than the Italian sovereign. DBRS currently rates the Republic of Italy at BBB (high)/R-1 (low) with a Stable trend.

RATING DRIVERS

The Bank’s ratings are at the same level as the sovereign rating, and one notch upgrade of the Italian sovereign would likely result in one notch upgrade of the Bank’s Issuer Ratings. Positive rating pressure would also require Intesa Sanpaolo to maintain an adequate capital position while continuing to improve its asset quality. Negative rating implications could result from a downgrade of Italy’s sovereign rating or a material deterioration in the Bank’s asset quality and capital position.

RATING RATIONALE

Intesa Sanpaolo maintains a leading market position in the Italian retail and commercial banking markets and a well-diversified business model. Over recent years, the Bank has been successful in expanding its fee-based activities such as asset management, private banking and insurance. The contribution from fee and commission income has increased to approximately 45% of the Bank’s total income in 2017 from 37% in 2013. The Bank has maintained good cost discipline and achieved progress in Corporate simplification and controls. In terms of geographical reach, ISP has a small presence in some CEE countries and Africa. The domestic market accounted for approximately 76% of the Bank’s total operating income in 1Q18.

The Bank’s earnings generation is supported by solid fee income, good efficiency levels and lower cost of risk. In 1Q 2018 fees were up by 4.5% YoY, the annualised cost of risk was down by 33bps to 48bps, and the cost to income ratio improved to 47.8%. The Bank’s net interest income still reflects some pressure from the low interest rate environment, despite higher lending volumes and lower funding costs. For 1Q18, the Bank reported net income of EUR 1,252 million which compared with EUR 901 million pro-forma profit in the same period of 2017. The results for 1Q18 were also supported by profits on financial assets.

The Bank’s stock of non-performing loans (NPLs) continued to decrease in 1Q 2018. Total gross NPLs amounted to EUR 50.6 billion, versus EUR 52.1 billion at YE-2017, supported by lower inflows and higher recoveries. The gross NPL ratio stood at 11.7% at 1Q18, which is still high and above the average for the Bank’s international peers. On a net basis, NPLs decreased to EUR 21.9 billion from EUR 25.5 billion at FY17, also thanks to higher provisions under the IFRS 9 first-time adoption (FTA). ISP’s total NPL coverage ratio strengthened to 56.7% in 1Q 18, from 51.1% at FY17.

As part of the 2018-2021 business plan, in April 2018, the Bank signed a NPL partnership with Intrum. The agreement includes the disposal of ISP’s NPL platform with a portfolio of EUR 10.8 billion in gross NPLs as well as a 10-year servicing contract on the Bank’s portfolio of bad loans (or sofferenze). Following the deconsolidation of this NPL portfolio which is expected in the second half of 2018, the Bank’s 1Q18 pro-forma NPL ratio would improve to approximately to 9.5%. ISP expects its gross NPL ratio to fall to 6% by 2021.

From a funding prospective, Intesa maintains a solid funding profile which is underpinned by the Bank’s large retail funding base, as well as its solid access to the wholesale funding markets. With EUR 87 billion in total unencumbered assets at 1Q18, the Bank has a sizable liquidity buffer for future bond maturities. The Bank’s LCR and NSFR indicators remained well above 100% in 1Q18.

Intesa Sanpaolo maintains an adequate capital position and solid buffers over the minimum regulatory and supervisory requirements. At the end of 1Q18, the Bank reported a CET1 ratio (phased-in) of 13.3% (or 12.2% excluding the mitigation of the IFRS 9 FTA) and total capital ratio of 17.9%.

The Grids Summary Grades for Intesa Sanpaolo SpA are as follows: Franchise – Strong; Earnings – Good; Risk Profile – Moderate; Funding & Liquidity – Strong / Good; Capitalisation – Good.

Notes:
All figures are in Euros unless otherwise noted. Pro-forma data include the former Venetian banks.

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 (January 2018). These 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 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: September 19, 2013
Most Recent Rating Update: July 14, 2017
DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

DBRS rating definitions and the terms of use of such ratings are available at www.dbrs.com

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.