DBRS Morningstar Confirms Banca Monte dei Paschi di Siena’s Ratings at B (high), Trend Now Negative

DBRS Ratings GmbH (DBRS Morningstar) 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 the Group’s long-term ratings has been revised to Negative from Stable. DBRS Morningstar also confirmed the Long-Term and Short-Term Critical Obligations Ratings (COR) at BBB (low) / R-2 (middle) and the Trend remains Stable. This reflects DBRS Morningstar’s expectation that, in the event of a resolution of the Bank, certain liabilities (such as payment and collection services, obligations under a covered bond program, payment and collection services, etc.) have a greater probability of avoiding being bailed-in and are likely to be included in a going-concern entity. The Bank’s Deposit ratings were confirmed at BB (low)/R-4, 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 Intrinsic Assessment (IA) of the Bank is B (high) and the Support Assessment is SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The change of the Trend to Negative reflects our view that the wide and growing scale of economic and market disruptions resulting from the coronavirus (Covid-19) pandemic will increase the pressure on the Bank, especially its profitability, cost of risk and asset quality. The impact will likely emerge in the coming quarters, whilst the implications for the medium to long-term will depend on the evolution of the outbreak. Downward rating pressure would intensify should the crisis be prolonged.

DBRS Morningstar will monitor the performance of the Bank in the coming quarters, including its measures to support the customer base, and the implementation of the debt moratoriums. At the same time, we will assess the impact of the unprecedented support measures announced by the Italian government, as well as several other international authorities and central banks.

The confirmation of BMPS’s ratings takes into account the progress the Bank has made in improving its asset quality through reducing its stock of Non-Performing Exposures (NPEs). However, the stock of NPEs remains high and above those of European peers and we expect a deterioration of the Bank’s risk profile as results of the Covid-19 pandemic, albeit mitigated by the Italian government and the European authorities’ support measures. In addition, the current situation could bring delays to the Bank’s planned NPE reduction, which in our view is key to a successful exit from the Italian government ownership.

BMPS’s ratings are underpinned by its position as Italy’s fourth largest bank by total assets and significant market share in its home region of Tuscany. However, 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. The Bank is currently still owned by the Italian Ministry of Finance (MEF) with a 68% stake. We view the current situation as adding new challenges and higher execution risk to the exit plan, which the MEF was expected to submit in 2020.

In addition, the ratings take into account the Bank’s weak, albeit improving, underlying profitability, which reflects modest revenues, which will face additional pressure as a result of the Covid-19 pandemic and subsequent lockdown of the country. Whilst we previously observed some improvement in the Bank’s access to wholesale funding markets, we believe this could come under pressure as a result of the crisis, albeit mitigated by the support provided by the ECB. The ratings also incorporate the Bank’s stable liquidity position, and adequate capital buffers.

RATING DRIVERS
Any upgrade is unlikely in the short-term given the Negative trend. However, the trend on the Long-Term ratings could revert to Stable if the Bank were able to demonstrate limited earnings and asset quality impact from the global coronavirus pandemic.

A downgrade would likely be driven by a significant deterioration of the Bank’s profitability or capital. A downgrade could also occur should the Bank experience severe delays in reducing its non-performing exposures further than the already achieved targets in the restructuring plan, as a result of the global coronavirus pandemic.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

The Grid Summary Grades for Banca Monte dei Paschi di Siena SpA are as follows: Franchise Strength – Moderate; Earnings – Weak/Very Weak; Risk Profile – Weak/Very Weak; Funding & Liquidity – Weak; Capitalisation – Weak.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Company Documents, BMPS 2019 Report, BMPS 2019 Press Release, BMPS 2019 Presentation 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 12-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

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/359170
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: January 18, 2013
Last Rating Date: June 19, 2019

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