DBRS Morningstar Confirms BP Alto Adige at BBB (low)/R-2 (middle), Trend Remains 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. The trend on the Bank’s long-term and short-term ratings remains Negative. The Intrinsic Assessment (IA) of the Bank is maintained at BBB (low) and the Support Assessment at SA3. Today’s rating action follows our full annual review of the Bank’s ratings. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

In maintaining the Negative Trend, we continue to take into account the additional risks for the Bank’s already modest profitability levels and asset quality stemming from the wide economic and market disruption resulting from the Coronavirus Disease (COVID-19) pandemic. The impact will likely emerge throughout 2020, whilst the implications for the medium to long-term remain highly uncertain and the extent of the impact will depend on the evolution of the pandemic and the extent and pace of the economic recovery. Downward rating pressure would intensify should the crisis be prolonged.

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

RATING DRIVERS

Given the Negative trend, a rating upgrade is unlikely at this time. However, the trend on the Long-Term ratings could revert to Stable if the Bank were able to demonstrate limited earnings and asset quality disruption in the current environment, whilst maintaining sound capital buffers.

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

RATING RATIONALE

With around EUR 11 billion of total assets at YE 2019, the Bank is small but it has a leading market position in the wealthy autonomous region of Trentino-Alto Adige / Südtirol. The Bank expanded its franchise in the region of Veneto with the acquisition of Banca Popolare di Marostica in 2015. Located in the north-eastern part of Italy, the region of Trentino-Alto Adige has historically outperformed the rest of Italy, benefiting from its strategic location at the border with Austria and Switzerland, and its special status which provides greater autonomy. Nonetheless, like the rest of the country, the disruption resulting from COVID-19 is having a significant impact on the local economy, especially in the SME sector.

This environment puts further pressure on the Bank’s profitability. BPAA's earnings profile is generally weak reflecting low customer margins and modest revenue diversification, low efficiency levels, as well as a still large NPL stock. In 2019, BPAA reported a net loss of EUR 84 million, compared to a net profit of EUR 34 million in 2018, mainly as result of a goodwill impairment of around EUR 100 million. This goodwill was largely attributable to the acquisition of Banca Popolare di Marostica in 2015. The results also showed a significant increase in provisions driven by the need to increase the Bank’s NPL reserves.

The economic disruption and uncertainty resulting from COVID-19 creates additional risk for the Bank’s revenues, in particular fees and commissions amid lower business volumes and rising risk aversion from customers, as well as higher provisioning costs in anticipation of future asset quality deterioration.

Around 52% of the Bank’s customer loan book at YE 2019 is related to exposures to non-financial corporations, most of which are SMEs. The industries that are most vulnerable to the pandemic include tourism & hospitality (which is one of the key sectors for the region of Trentino Alto Adige), transportation, retail commerce and manufacturing. In response to the outbreak, the Bank has been offering its own moratorium programmes, in addition to the national programs. Further support has also been provided by the regional authorities. Nevertheless, while we believe that these initiatives will help to contain the economic fallout, it is unlikely they will prevent the build-up of new NPLs. We expect higher NPL inflows in 2020, with the increase in default rates more pronounced in 2021 once the moratoriums have expired. In addition, we believe that the risks for the existing NPLs (Stage 3 loans) have increased in the current environment.

In 2019, the Bank reported a stock of gross NPLs of EUR 555 million, down 16% YoY mainly on the back of disposals. The Bank’s gross NPL ratio stood at 7.4%, down from 8.8% in 2018, whereas the net NPL ratio declined to 3.6% from 5.2% in 2018. The total NPL coverage ratio increased to 53.2% from 44.0%, mainly due to higher loan loss provisions on Unlikely-to-Pay Loans (UTP). Despite the improvement, the Bank’s asset quality metrics continue to compare unfavourably with the European average.

On the funding side, the Bank maintains a large and stable deposit funding base, as well as an adequate stock of eligible liquid assets. As of end-2019, deposits from retail and corporate clients, were up YoY, accounting for 83.5% of direct funding from customers. The higher refinancing risks on the wholesale market due to COVID-19 are mitigated by the access to ECB programmes.

The Bank’s capital ratios strengthened in 2019, on the back of lower RWAs. The Bank’s CET1 ratio (phased-in) stood at 12.74% at end-2019, up from 11.25% at end-2018. On a fully-loaded basis, CET1 and Total Capital ratios were 11.9% and 14.1% respectively. In our view, the Bank’s ability to improve its capital position is constrained by its fragmented shareholder base and modest internal capital generation. Some capital relief, however, may be expected in 2020 from RWA optimisation measures.

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

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 Banca Popolare dell’Alto Adige 2016-2019 Annual Reports, Banca Popolare dell’Alto Adige Press Release of April 22, 2020, 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/361427

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: February 18, 2014
Last Rating Date: April 2, 2020

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