DBRS Confirms Banca Monte dei Paschi di Siena’s B (high)/R-4 Issuer Ratings; Stable Trend

DBRS Ratings GmbH (DBRS) confirmed the ratings of Banca Monte dei Paschi di Siena SpA (BMPS or the Bank), including the Long-Term Issuer Rating of B (high) and the Short-Term Issuer Rating of R-4. The trend on all ratings remains Stable. Concurrently, DBRS maintained the Bank’s Intrinsic Assessment at B (high) and the 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 BMPS’s ratings with a Stable trend takes into account the progress the Bank has made in improving its asset quality through reducing its stock of Non-Performing Exposures (NPEs). Nonetheless, the stock of NPEs remains high and the Bank’s current business plan encompasses a gradual reduction. In addition, the ratings take into account the Bank’s weak profitability, which reflects modest revenues and still high provisioning costs, as well as increased refinancing costs on the wholesale funding markets. The ratings also considered the Bank’s stable liquidity position and its modest capital buffers.

RATING DRIVERS

Positive rating pressure would require significant improvements in asset quality supported by adequate capital levels, progress in revenue generation, and improved access to the funding market. Downward rating pressure could arise from a weakening in funding and liquidity or significant deterioration in capital.

RATING RATIONALE

BMPS is Italy’s fourth largest bank by total assets and has a significant market share in its home region of Tuscany. The Bank is currently undertaking a restructuring plan for 2017-2021, following the approval of the Italian State’s precautionary recapitalisation of the Bank in 2017. As part of this plan, in 2018, BMPS continued to reduce its NPEs and improve efficiency with the closure of branches and headcount reduction. Nonetheless, the Bank continues to face several challenges, particularly in terms of revenue generation and weak asset quality, and the execution risks of the current restructuring plan remain high. The increasing premium required by investors has also contributed to higher refinancing costs and the Bank’s issuance amount of Tier 2 bonds in 2018 was below the target agreed with the European Commission (EC).

In line with the State Aid procedures and the restructuring plan, the Italian Ministry of Finance (MEF), which is BMPS’s main shareholder with a 68% stake, is expected to submit an exit plan to the European Commission by end-2019. In DBRS’s view, any plan is likely to include an acceleration of the Bank’s de-risking plan.

In 1Q19, the Bank reported a net income of EUR 27.9 million, down from EUR 187.6 million in 1Q18, reflecting weaker core revenues and high provision costs. The Bank’s net interest income continued to be impacted by the ongoing de-risking plan, still high funding costs and modest lending rates. Revenues from fees and commissions were also subdued. Increased market uncertainty and restructuring actions contributed to lower fees from the distribution of wealth management products and commission on loans. The Bank’s cost of risk remained elevated at 73 bps, reflecting the high stock of NPLs and the challenging operating environment in Italy. In terms of efficiency, the Bank maintains a good track record in reducing costs and continues with the rationalisation of its operating structure.

In 2018, the Bank completed approximately EUR 28 billion of NPE disposals, including a securitisation of EUR 24 billion. The total gross NPE stock, excluding interest on arrears, decreased to EUR 17 billion from EUR 43 billion at YE17, and decreased further to EUR 16 billion at 1Q19. As of end-1Q19 the Bank’s gross NPE ratio was reported at 16.3%, down from 17.3% at YE18 and 35.8% at YE17, whilst the total NPE coverage stood at 53.1%. BMPS’ gross NPE ratio is expected to decrease to 12.9% in 2021, according to the Bank’s current business plan. This level will, however, remain significantly higher than the European average.

BMPS is largely funded by deposits from retail and corporate clients. After a prolonged period of uncertainty, the completion of the precautionary recapitalisation has helped to stabilise the Bank’s deposit base. On the wholesale market, the Bank issued covered bonds totaling EUR 1 billion in January 2019. However, funding costs for the Bank have increased, especially on the unsecured market, and as a result of the higher premium required by investors, the Bank postponed a second issuance of Tier 2 bonds, initially targeted to take place by the end of 2018. Maintaining investor confidence remains a key focus of the Bank, especially considering the significant maturities expected in 2020. However DBRS notes that the Bank maintains a sizable stock of unencumbered assets totaling EUR 22.7 billion, or around 17% of the Bank’s total assets. At end 1Q19, the Bank reported an LCR of 241% and an NSFR of 111%.

BMPS’ capital position strengthened following the precautionary recapitalisation and the burden-sharing with the holders of its subordinated bonds. Nonetheless, we continue to view the Bank’s current capital buffers as modest considering its asset quality problems, the challenging market access and the supervisory requirements. At 1Q19, BMPS reported a phased-in Common Equity Tier 1 (CET1) ratio of 13.3% (or 11.2% fully loaded), slightly down QoQ, mainly due to an increase in RWAs from credit risk and the phasing-in of the IFRS9 impact. The Bank’s phased-in total capital ratio was 14.7% (or 12.6% fully loaded). According to the ECB 2019 SREP, the Bank is required to maintain a minimum CET1 ratio of 11.3% (including a Pillar 2 guidance of 1.3% and a Pillar 2 requirement of 3.0%) and a total capital ratio of 13.5%.

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.

Notes:

All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Nicola De Caro, Senior Vice President – Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director – Global FIG
Initial Rating Date: January 18, 2013
Most Recent Rating Update: January 15, 2019

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