DBRS Morningstar Confirms Iccrea at BBB (low)/R-2 (middle), Trend Revised to Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Iccrea Banca SpA’s (Iccrea or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer rating of R-2 (middle). 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. At the same time, the trend on the Bank’s long-term and short-term ratings was revised to Negative from Stable. The Intrinsic Assessment (IA) of the Bank is maintained at BBB (low) and the Support Assessment at SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The change of the Trend to Negative on Iccrea’s ratings 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. We also expect significant operational challenges for the newly formed Gruppo Bancario Cooperativo Iccrea (the Group).

The full impact will likely emerge in the coming quarters, with the implications for the medium to long-term depending on the evolution of the outbreak, the length of the economic shutdown, as well as the transition phase of the recovery. Downward rating pressure would intensify should the crisis be prolonged.

In confirming the ratings of Iccrea, we consider its key role as the central entity of the Group, the strong retail funding base, as well as its moderate capital buffers, albeit these were strengthened with the issuance of Tier 2 debt in Q4 2019.

Formed in March 2019, the Group is the largest cooperative network in Italy with 136 small cooperative banks and total combined assets of around EUR 150 billion. The Group has a strong domestic footprint with over 2,600 branches, 22,500 employees and 4.2 million clients. Following the start of the outbreak, Iccrea has put in place several measures to preserve its business continuity. The use of technology and digital channels are helping the reduced activity of the branches.

With the reform of the cooperative sector, we believe Iccrea and the cooperative banks are better positioned than previously. The cohesion agreement amongst members creates a framework for more effective coordination and better controls within the Group. At the same time, the guarantee scheme underpins the Group’s solvency and its financial stability. Nonetheless, this structure is relatively new and it will require time and further investment for its full integration and consolidation. Meanwhile, the disruption from the COVID-19 pandemic will create additional operational challenges, given the complexity of the Group and the high granularity of its customer base. Moreover, we believe that the already weak position of some cooperative banks will deteriorate further in the current challenging environment.

Despite the recent reduction in NPLs, the Group’s asset quality is still affected by a large stock of impaired loans and its NPL ratios continue to compare unfavourably with domestic and international peers. In our view, the ongoing economic disruption could contribute to the build-up of new NPLs, especially considering its sizable exposure to micro-small-medium corporates, and delay the Group’s NPL reduction plan. Iccrea’s profitability level could also be impacted by lower revenues as well as rising cost of risk, while any initiative to improve the Group’s modest operating efficiency levels may prove challenging at this time.

We will continue to monitor the performance of the Bank, its contingency plans and all measures to support the franchise and customer base, including the debt moratorium measures. 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, to mitigate the economic fallout.

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 to demonstrate limited earnings and asset quality impact from the global COVID-19 pandemic.

A downgrade would likely be driven by a significant deterioration of the Bank’s profitability or capital. A downgrade could also occur if much of the progress in asset quality made by the bank were to be reversed as a result of the COVID-19 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 Iccrea Banca SpA are as follows: Franchise Strength – Good / Moderate; Earnings – Moderate / Weak; Risk Profile – Moderate / Weak; Funding & Liquidity – Good / Moderate; Capitalisation – Moderate.

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 Iccrea H1 2019 Report, Iccrea Press Releases, 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/359187

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Nicola De Caro, Senior Vice President, Credit Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director, Credit Ratings
Initial Rating Date: July 26, 2018
Last Rating Date: July 23, 2019

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