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

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banco BPM SpA (BBPM 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 remains stable. The Bank’s Deposit ratings were confirmed at BBB/R-2 (high), one notch above the IA, reflecting the legal framework in place in Italy which has full depositor preference in bank insolvency and resolution proceedings. DBRS Morningstar has also maintained the Bank’s Intrinsic Assessment at BBB (low) and support assessment at SA3.

As part of this rating action, DBRS Morningstar also confirmed the BBB (low) / R-2 (middle) Issuer Ratings of Banca Akros SpA, the corporate and investment banking subsidiary of BBPM SpA. Banca Akros is a core component of BBPM’s franchise and, therefore, DBRS Morningstar 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. 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 and the Stable Trend reflects the progress the Bank has made in reducing its large stock of non-performing Exposures (NPEs) whilst strengthening its capital position, as well as the additional measures taken to strengthen the franchise and streamline the operating structure. The ratings are underpinned by the Bank’s solid market position as the third largest banking franchise in Italy, as well as the stable retail funding base and the improved access to the wholesale markets in 2019.

The ratings also continue to reflect the Bank’s large, albeit reducing, stock of NPEs and its modest profitability, reflecting core revenue pressure due to the low interest rate environment, the ongoing de-risking and the still high cost of credit.

RATING DRIVERS
Upward rating pressure would require improvement in core revenues and net profitability as well as further progress in NPE reduction.

Negative rating pressure could arise from a significant weakening of the Bank’s capital position. Challenges in improving profitability and asset quality could also lead to negative rating pressure.

RATING RATIONALE
BBPM is Italy’s third 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. In 2019, as part of the post-merger reorganisation, BBPM took additional steps to reduce complexity, improve efficiency and asset quality whilst maintaining adequate capital levels through asset disposals. In addition, the Bank continued to downsize its branch network and workforce.

In DBRS Morningstar’s view, profitability remains modest, reflecting weak revenues and the high cost of risk related the challenging environment and the ongoing restructuring. Net interest income (NII) was down 12.4% YoY in 9M19, impacted by the ongoing low interest rate environment and the de-risking process. Fees and commissions also decreased 3.9% YoY in 9M19. On the other hand, operating costs were down 3.5% YoY in 9M19, supported by the ongoing reduction in the number of branches and workforce. Loan loss provisions (LLP) were down 41.5% in 9M19 YoY to EUR 558.0 million, absorbing 50.3% of Income before Provisions and Taxes (IBPT). The Bank’s annualised cost of risk remained high at 69 bps in 9M19 compared to 184 bps in 2018, albeit more in line with the average for most domestic peers.

BBPM has made significant progress in reducing its NPE stock, mostly through securitisations and disposals. Total gross NPEs decreased by EUR 15.0 billion to EUR 10.4 billion from end-2017 to at 9M19. The total gross NPE ratio was 9.4% at 9M19, down from 21.1% at FY17, whilst the total NPE coverage stood at 42.8%. Net of provisions, the Bank’s net NPE ratio was 5.6% at 9M19, down from 12.1% at end-2017. Nonetheless, these levels remain much above the European average. DBRS Morningstar expects the Bank to continue working on improving its asset quality through disposals and organic workout. The Bank expects to finalise the sale of a EUR 650 million portfolio of bad leasing receivables in 1H20.

DBRS Morningstar views BBPM’s funding profile as solid, supported by a large and stable deposit base which accounted for approximately 76% of the Bank’s funding at 9M19. In addition, DBRS Morningstar views as positive that the Bank has started to increasingly diversify its funding sources through issuances on the wholesale markets in view of the upcoming MREL requirements. The Bank maintains a solid liquidity position with a stock of unencumbered liquid assets of EUR 21.1 billion at 9M19.

DBRS Morningstar views BBPM’s capital position as adequate as several capital management actions mitigated the impact from the NPL reduction plan. The Bank maintains ample capital cushions of around 450 bps above the CET1 and 350 bps over the Total Capital requirements. As of 9M19, the Bank’s reported CET1 ratio was 12.1%. The Total Capital ratio (fully loaded) was 14.4% at 9M19, reinforced by a EUR 300 million inaugural Additional Tier 1 (AT1) issuance in April 2019. The Bank also proceeded to issue EUR 350 million of Tier 2 in October 2019 which should positively impact the Total Capital ratio by around 50 bps.

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.

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, the European Central Bank, the European Banking Authority 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: Arnaud Journois - Vice President – Global FIG
Rating Committee Chair: Ross Abercromby - Managing Director - Global FIG
Initial Rating Date: January 5, 2017
Last Rating Date: December 13, 2018

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Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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