DBRS Morningstar Revises Trend on Intesa SanPaolo to Negative after Sovereign Rating Action

DBRS Ratings GmbH (DBRS Morningstar) revised its trend on Intesa Sanpaolo SpA’s (ISP, Intesa or the Bank) Long-Term and Short-Term Issuer ratings to Negative from Stable. Concurrently, the Bank’s Long-Term and Short-Term Issuer Ratings were confirmed at BBB (high)/R-1 (low). The Intrinsic Assessment (IA) of the Bank is maintained at BBB (high) and the support assessment at SA3. 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 on ISP’s ratings is driven by DBRS Morningstar’s rating action on the Republic of Italy. On May 8, 2020, DBRS Morningstar confirmed the Republic of Italy’s Issuer ratings at BBB (high)/R-1 (low) and revised the Trend to Negative from Stable reflecting the heightened risks and uncertainty to the economy caused by the global pandemic (COVID-19) and its implications for Italy’s ability to improve its public debt sustainability in the future. For more details on the rationale for the Sovereign rating action, refer to the press release (DBRS Morningstar Confirms Republic of Italy at BBB (high), Trend changed to Negative). Today’s rating action also incorporates our full annual review of ISP’s ratings.

ISP’s Long-Term Senior Debt rating and its Deposit ratings are both positioned in line with the sovereign rating of Italy. While we continue to recognise the strengths of ISP’s business model, its leading market positions and solid capital levels, ISP’s ratings are highly correlated with any changes made to the sovereign rating, given its high exposure to Italian sovereign bonds and concentration in the domestic banking market. The Negative trend is in line with the trend on DBRS Morningstar’s Italian sovereign rating and incorporates additional downside risks for the Bank’s operating environment.

RATING DRIVERS

Given the Negative trend and the rating on the Italian Sovereign, a rating upgrade is unlikely at this time. However, the trend on the Long-Term ratings would change to Stable if the Trend on the Italian Sovereign was to return to Stable, and the impact of the current economic environment on the Bank’s earnings and asset quality is manageable.

A downgrade could result from a downgrade of Italy’s Sovereign rating or a material deterioration in the Bank’s risk profile and capital position.

RATING RATIONALE

As Italy’s largest provider of financial services to businesses and individuals, Intesa plays a critical role in the Italian financial system and the country’s payment mechanisms. The bank has a well-diversified business model and it has proved successful in expanding its fee-driven activities such as asset management, private banking and insurance. Revenue diversification and strong cost discipline have been key drivers of the Bank’s resilient pre-provision income, particularly during this period of very low interest rates. Moreover, the cost of risk has improved following the significant reduction in Non-Performing loans. Nevertheless, the wide and growing scale of economic and market disruptions resulting from the COVID-19 pandemic create additional risks for the Bank’s asset quality and profitability.

In Q1 2020, the Bank posted net income of EUR 1.15 billion, up by 10% compared to Q1 2019. The results were mainly supported by a significant growth of trading and financial income from the CIB division, relatively stable core revenues driven by healthy performance in January and February, and lower operating costs. Total provisions were up as the Bank started to report COVID-19 related provisions in anticipation of future increase in NPLs amid the weaker economic environment in Italy.

In response to the COVID-19 outbreak, the Italian authorities introduced several measures to support corporates and families, including the introduction of national guarantee schemes on new loans and debt moratoriums. At same time, Intesa Sanpaolo, similar to other Italian banks, extended its own moratorium programs to a broader range of customers. As of the end of April, Intesa has received requests for moratorium on a balance outstanding amount of EUR 38 billion (or 9.7% of total performing customer loans), as well as EUR 3 billion of requests for State-guaranteed loans (or 0.8% of total performing customer loans). In our view, the combination of these initiatives, some of which are still unfolding, will help to contain the economic fallout, but it is unlikely they will prevent the build-up of new NPLs.

In our view, the rise of new defaults will be become more pronounced in 2021 once the moratoriums have expired. This will weigh on the Bank’s asset quality and the cost of risk. We also believe the risks for the existing NPL loans (Stage 3) have increased in the current environment. At present, the Bank expects its cost of risk to increase up to 90 bps in 2020 and 70 bps in 2021. These costs, however, might increase further should the adverse economic impact be prolonged.

Intesa is entering this period of high uncertainty with, in DBRS Morningstar’s view, a stronger balance sheet than in the previous crisis. Supported by disposals and lower NPL inflows, the gross stock of NPLs decreased to EUR 30.2 billion at end-March 2020, from its peak level of EUR 64.5 billion as of end-September 2015 , while the gross NPL ratio stood at 7.1% at end-Q1 2020, down from 17.2% at end-9M 2015. In addition, the Bank’s exposure to the hardest-hit sectors, such as hospitality, transportation and oil & gas, appears moderate.

The Bank maintains a robust funding profile underpinned by a large deposit base and its access to the international funding market has remained stronger than Italian peers, even during periods of stress. In addition, the Bank maintains an adequate capital position with a fully-loaded CET1 ratio of 14.5% and a Total Capital ratio, phased-in, of 18.5% in Q1 2020. The capital buffers were positively impacted by the decision of ISP’s board of directors to suspend the payment of roughly EUR 3.4 billion in dividends, following the ECB’s recommendation amid the effects of the coronavirus pandemic on the economy.

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 Intesa Sanpaolo SpA are as follows: Franchise – Strong; Earnings – Good; Risk Profile – Moderate; Funding & Liquidity – Strong / Good; Capitalisation – Good.

DBRS Morningstar notes that this Press Release was amended on May 13, 2020, to include lead analyst information and rating entity information.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodologies are 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
and the DBRS Criteria: Guarantees and Other Forms of Support (22 January 2020) https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support.

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 Intesa Sanpaolo Q1 2020 Results Press Release, Intesa Sanpaolo Q1 2020 Results Presentation, Intesa Sanpaolo Annual Reports, 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/360897

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Nicola De Caro, Senior Vice President - Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: September 13, 2013
Last Rating Date: April 2, 2020

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