DBRS Confirms Banco BPM at BBB (low)/R-2 (middle); Trend Revised to Stable

DBRS Ratings Limited (DBRS) confirmed the ratings of Banco BPM (or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle), and changed the Trend to Stable from Negative. DBRS has also maintained the Bank’s Intrinsic Assessment at BBB (low) and support assessment at SA3.

As part of this rating action, DBRS also confirmed the BBB (low) / R-2 (middle) Issuer ratings of Banca Akros, the corporate and investment banking subsidiary of Banco BPM SpA, and also changed the trend to Stable. Banca Akros is a core component of Banco BPM’s franchise and, therefore, DBRS has maintained a support assessment of SA1 on Banca Akros which implies strong and predictable support from the Parent. As a result, the ratings of Banca Akros are at the same level as the Group.

These rating actions follow DBRS’s annual review of the Bank’s credit profile. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the BBB (low) Long-Term Issuer Rating reflects the Bank’s stable market position as third largest banking franchise in Italy, and the progress in reducing its large stock of Non-performing Exposures (NPEs). The Trend change reflects the view that the recent capital strengthening puts Banco BPM in a stronger position to accelerate its NPE reduction plan. On November 30, 2018, the Bank announced the reorganisation of its consumer finance activities. The capital boost from the consumer credit deal, as well as the expected capital gain on the sale of the debt collection unit, will help cushion the financial impact from a disposal of approximately EUR 7-7.8 billion bad loans (project “ACE”), which is targeted for completion by 2Q19. The Bank’s pro-forma gross NPE ratio would fall to 11.3%-10.6% from 15.9% as of September 2018, whilst the overall capital ratios should remain largely unchanged and in line with the levels reported in 3Q18.

The ratings, however, continue to reflect the Bank’s stock of NPEs, which will remain large after the planned disposal of project ACE, its modest profitability levels, as well as the challenges posed by the difficult economic environment in Italy and higher Sovereign bond yields.

RATING DRIVERS

The current ratings and the Stable Trend incorporate the expectation that Banco BPM will complete its planned NPE disposal (project ACE) in line with the timing and impact anticipated by the Bank. Positive rating pressure would require further improvements in asset quality and profitability. Negative rating pressure could arise from a significant weakening of the Bank’s capital and funding position or should the Bank face challenges in improving its profitability and asset quality.

RATING RATIONALE

Banco BPM SpA is Italy’s 3rd largest bank by total assets. The Bank, which was formed in 2017 from the merger of Banco Popolare and Banca Popolare di Milano, maintains a solid franchise in retail and commercial banking, especially across the wealthy regions of Lombardy, Veneto and Piedmont. Since the merger, the Bank has undergone a large reorganization process to reduce complexity, improve efficiency and strengthen capital levels. The process included new partnership agreements, incorporations and asset disposals spanning from traditional retail activities to Corporate & Investment banking, asset management and private banking, insurance and consumer credit.

The Bank’s modest profitability reflects pressure on revenues and high costs related to asset quality and the Bank’s ongoing de-risking plan. The low interest rate environment and high market competition continue to weigh on the Bank’s core net interest income (NII), while Corporate reorganisation and higher market volatility contributed to subdued fees. On the other hand, the Bank’s efficiency levels are improving, supported by the ongoing reduction in the number of branches and workforce. The Bank’s cost of risk will likely remain high in 2018 also a result of the NPE disposal envisaged in project ACE. However, the lower stock of NPEs should support an improvement in cost of credit in 2019.

At end-September, Banco BPM’s total gross NPEs decreased to EUR 18.5 billion, down by 26% (or EUR 6.6 billion) from January 1, 2018, mainly as a result of approximately EUR 5 billion securitisation of bad loans, using the government guarantee scheme (GACS) and higher recoveries from workout measures. The total gross NPE ratio improved to 15.9% from 20.9%, while the total net NPE ratio decreased to 8.5%, with a total coverage ratio of 50.6% at end-September 2018.

On December 10, 2018, the Bank announced that it has accepted a binding offer to sell a portfolio of bad loans in the range of a nominal value of EUR 7-7.8 billion (project ACE), which should bring the pro-forma gross NPE ratio down to 11.3%-10.6% from 15.9% as of September 2018. This level, however, will continue to remain higher than the European average. The impact from this disposal is expected to be largely offset by the proceeds from the consumer transaction, as well as the expected disposal of a stake in the Bank’s NPL servicing platform. In addition, the Bank plans to sell a portfolio of EUR 800 million of non-performing leasing loans.

Banco BPM’s funding profile is underpinned by its large and stable retail deposit base, as well as adequate liquidity buffers. Access to the wholesale market, however, has become more difficult due to rising sovereign spreads. This will likely increase refinancing costs especially in the context of the future implementation of MREL requirements and repayment of ECB TLTRO funds. At end-September 2018, the Bank had a large exposure to ECB funding of EUR 21 billion, or 13% of total assets.

The Bank maintains moderate capital buffers. Several capital management actions have cushioned the impact from the de-risking plan and rising sovereign spreads in 2018. As of end-September, the Bank’s reported CET1 and Total Capital ratio (fully loaded) were 11.2% and 13.7% (including the impact of the IFRS9 first-time adoption), which are at the low end of the European peer group. On a transitional basis, the Bank’s CET1 ratio and Total Capital ratio were 13.2% and 15.9%.

On November 30, 2018, the Group signed a Memorandum of Understanding with Credit Agricole in the consumer finance business. As part of the agreement, Banco will sell the captive business of ProFamily SpA to Agos, the joint venture with Credit Agricole, and receive a put option to reduce its stake in Agos. The transaction, which is expected to generate 80 bps of CET 1 capital, will help offset the impact from the project ACE. The Bank’s pro-forma capital ratios as of September 2018 would remain largely unchanged with the CET1 fully loaded ratio expected in the range of 11%-11.5% (or 13%-13.5% phased-in).

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

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found 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: Nicola De Caro – Senior Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: January 5, 2017
Most Recent Rating Update: December 15, 2017

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