DBRS Morningstar Confirms UBI Banca’s Issuer Ratings at BBB/R-2 (high); Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Unione di Banche Italiane SpA (UBI Banca, UBI or the Bank), including the Long-Term Issuer Rating of BBB and the Short-Term Issuer Rating of R-2 (high). The trend on all ratings remains Stable. DBRS Morningstar has also maintained the Bank’s Intrinsic Assessment (IA) at BBB and support assessment at SA3. The Bank’s Deposit ratings were confirmed at BBB (high)/R-1 (low), one notch above the IA, reflecting the legal framework in place in Italy which has full depositor preference in bank insolvency and resolution proceedings. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the BBB Long-Term Issuer Rating with a Stable Trend reflects UBI’s progress in further reducing the stock of non-performing exposures (NPEs), its adequate liquidity position and moderate capital buffers. The ratings, however, continue to incorporate the Bank’s still high stock of NPEs and the high loan loss provisions which remain a major drag on the Bank’s profitability. In addition, the ratings consider the challenges the Bank is facing to improve its revenues in the context of the low interest rate environment and high market competition.

RATING DRIVERS

Positive rating pressure would require significant improvements in profitability and further progress in reducing NPEs. Negative rating pressure could arise from a material weakening of the Bank’s profitability and capital position or should the Bank be unable to continue improving its asset quality.

RATING RATIONALE

UBI is the 5th largest Italian bank with EUR 130 billion in total assets at end-September 2019. The Bank maintains solid market shares in the wealthy regions of Lombardy and Piedmont, as well as a large retail deposit base in central and southern parts of Italy.

In recent years, UBI has taken steps to improve efficiency, strengthen processes and reduce operational complexity. Major changes included the transformation from a cooperative bank into a joint-stock company, the implementation of a “Single Bank Project” which led to the merger of several banking subsidiaries into the parent company, as well as the adoption of a single tier governance system which replaced a two-tier board structure. In addition, the Bank continued to downsize its retail branch network.

In DBRS Morningstar’s view, the Bank’s profitability remains modest mainly as a result of the high loan loss provisions due to the ongoing NPE reduction plan, as well as revenue pressure and one-offs from corporate restructuring. For 9M19, the Bank posted a net result of EUR 191 million, down by 9% compared to the same period in 2018 (or 7% excluding non-recurring items).

The Bank´s core revenues were largely flat YoY at EUR 2.6 billion, supported by higher fee and commission income whilst net interest income (NII) was down by 3% YoY to EUR 1.4 billion due to the low interest rate environment, declining lending volumes and a high level of price competition. In this context, the Bank maintains a selective lending strategy.

The annualised cost of credit increased to 79 bps in 9M19 from 58 bps in 9M18 due to higher loan loss provisions. Over the last year, the Bank accelerated its NPE reduction plan via disposals. The stock of gross NPEs decreased by 21% to EUR 8.3 billion at end-September 2019 from EUR 10.5 billion at end-September 2018. The gross NPE ratio fell to 9.3% (or 5.8% net of provisions) from 11.1% in 3Q18. The improvement was supported by NPE disposals totalling around EUR 1 billion, internal work-outs and lower NPE inflows from performing loans. The annualised default rate stood at 1.1% in 9M19, down from 1.6% in 9M18, notwithstanding the moderate increase in past-due exposures following the implementation of the EBA’s new default definition.

Further reduction in NPEs is expected by FY19 from the ongoing sale of a portfolio of real estate leasing exposures and the sale of a portfolio of residential mortgages via a securitisation using the government guarantee scheme (GACS). Including these pending transactions, the Bank’s gross NPE ratio is expected to fall to around 8%. This level, however, will continue to remain high compared to the European average.

UBI’s funding profile is underpinned by its large and stable retail deposit base, as well as adequate liquidity buffers. Sight and time deposits with retail and corporate customers represent the main source of funding, accounting for 72% of total direct funding at September 2019. The Bank has increasingly tapped the wholesale bond market during 2019, issuing around EUR 5 billion of bonds as of November, including covered bonds, senior-preferred/non-preferred and Tier 2 instruments. In light of the foregoing issuances, the Bank is well positioned to meet its MREL requirements expected to be in force from June 2020.

The Bank maintains a moderate capital position. In 3Q19, the Bank’s fully-loaded common equity Tier 1 (CET1) ratio stood at 12.1%, up from 11.4% in September 2018, on the back of the contribution from retained earnings, RWA reductions, as well as higher fair value reserves for the Sovereign bond portfolio amid lower market spreads. The total capital ratio, fully-loaded, stood at 15.6%, up from 13.9% in 3Q18, also reflecting the issuance of subordinated bonds.

The Grid Summary Grades for Unione di Banche Italiane SpA are as follows: Franchise Strength – Good; Earnings – Moderate; Risk Profile – Moderate; Funding & Liquidity – Good; Capitalisation – Moderate.

Notes:
All figures are in EUR unless otherwise noted.

The principal 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 S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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: November 25, 2015
Last Rating Date: December 14, 2018

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