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

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banca Popolare dell’Alto Adige – Volksbank SpA (BPAA 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 reflects our view that the wide and growing scale of the economic and market disruptions resulting from the coronavirus (COVID-19) pandemic pose significant operational challenges and will likely put additional pressure on the Bank’s revenues, profits and balance sheet.

The confirmation of the Issuer Ratings at BBB (low) / R-2 (middle) takes into account the Bank’s stable funding franchise in its home region of Trentino-Alto Adige, as well as the progress made to reduce Non-Performing Loans (NPLs) and strengthen capital buffers in 2019.

With EUR 11 billion of total assets at YE 2019, although the Bank is small it has a leading market position in the wealthy autonomous region of Trentino-Alto Adige / Südtirol. Located in the North-eastern part of Italy, the region has historically outperformed the rest of Italy, benefiting from its strategic location at the border with Austria and Switzerland, and its special status which gives greater autonomy. Nonetheless, like the rest of the country, the economic shutdown is affecting the local economy and its SMEs, especially the tourism & hospitality industry, which is a key sector for the region.

DBRS Morningstar considers that the ongoing economic disruption could contribute to the build-up of new NPLs, considering the Bank’s sizable exposure to micro-small-medium corporates. At the same time, we expect the Bank’s already modest profitability to be impacted by lower revenues as well as a rising cost of risk. In this challenging environment, any existing restructuring program to support franchise and profitability could be halted. In our view, the Bank is less diversified and has less flexibility compared to its larger peers.

The full impact will likely emerge in the coming quarters, while the implications for the medium to long-term will depend 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.

DBRS Morningstar will continue to monitor the performance of the Bank, its contingency plans and all measures to support 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, asset quality and capital impact from the global coronavirus pandemic.

A downgrade would likely be driven by a significant deterioration of the Bank’s franchise, risk profile from the SME sector, or capital.

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 Popolare dell’Alto Adige SpA are as follows: Franchise Strength – Moderate; Earnings – Moderate / Weak; Risk Profile – Moderate; 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

The sources of information used for this rating include Banca Popolare dell’Alto Adige H1 2019 Report, Banca Popolare dell’Alto Adige 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/research/359193

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: February 18, 2014
Last Rating Date: May 30, 2019

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For more information on this credit or on this industry, visit www.dbrsmorningstar.com.