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

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 the Group’s long-term and short-term ratings has been revised to Negative from 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, 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. The trend on the Banca Akros’s long-term and short-term ratings has also been revised to Negative from Stable. A full list of rating actions is included 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 disruption resulting from the coronavirus (Covid-19) pandemic will put additional pressure on the Bank’s profitability and balance sheet. The deteriorating operating environment in Italy will likely affect the Bank’s revenues, asset quality and cost of risk. 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.

We will continue to monitor the performance of the Bank’s asset quality, its contingency plan and all measures to support franchise and customer base, including the implementation of the debt moratoriums. At the same time, we will assess the impact of unprecedented support measures announced by the Italian government, as well as several other international authorities and central banks. Supporting the banks and the economy is a critical factor to withstand the impact of this crisis.

The confirmation of BBPM’s Long-Term ratings at BBB (low) reflect our view that the significant progress since 2017 in reducing its non-performing exposures (NPEs) has left the Bank with a much cleaner asset quality profile. Nevertheless, we do expect some pressure on the Bank’ risk profile, albeit mitigated by the Italian government and the European authorities’ support measures.

In addition, the confirmation also incorporate the Bank’s solid market position as the third largest banking franchise in Italy, reinforced by measures to streamline the operating structure. However, considering the Bank’s strong presence in Lombardy and Veneto which remain some of the most affected regions in Italy by the global coronavirus pandemic, this could prove challenging for the bank’s earnings and asset quality. The ratings also continue to reflect modest profitability, which reflected core revenue pressure due to the low interest rate environment, the ongoing de-risking and the still high cost of credit. We also incorporate that profitability could be negatively impacted by the effects of the coronavirus pandemic, most notably weaker lending growth, lower fees and commissions as well as higher loan loss provisions. Ratings continue to be underpinned by the Bank’s adequate capital position, with ample cushions over regulatory requirements. These, combined by flexibility given by the regulator over capital buffers, should help the Bank mitigate the expected rise in risk-weighted assets (RWAs) driven by a deterioration in the loan book. Finally, we continue to view the BBPM as benefitting from a solid funding and liquidity profile, with the Bank’s increasingly diversifying its funding sources through issuances on the wholesale markets in 2019. However, the rating action takes into account that we expect challenging funding conditions as a result of the crisis, albeit mitigated by the ECB’s assistance program, most notably TLTRO.

RATING DRIVERS
Any upgrade is unlikely in the short-term given the recent change of trend. However, the trend on the Long-Term ratings could revert to Stable if the Bank were able demonstrate sustained improvement in core revenues despite the global coronavirus pandemic and limited asset quality impact.

The ratings could be downgraded if the Bank’s profitability experiences a material decline. A downgrade could also occur if much of the progress in asset quality made by the bank so far were to be reversed. A significant weakening of capital as a result of the coronavirus pandemic could also lead to downgrade.

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

DBRS Morningstar notes that this Press Release was amended on 13 November 2020 to correct the Capitalisation Grid Summary Grade to Moderate from Moderate/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, BBPM 2019 Presentation, BBPM 2019 Financial Data, BBPM 2020-2023 Strategic Plan 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/359185

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 5, 2017
Last Rating Date: November 21, 2019

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