DBRS Morningstar Confirms Banca Monte dei Paschi di Siena’s Ratings at B (high), Trend Now Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banca Monte dei Paschi di Siena SpA (BMPS or the Bank), including the Long-Term Issuer Rating of B (high) and the Short-Term Issuer Rating of R-4. The trend on the Group’s long-term ratings has been revised to Stable from Negative. DBRS Morningstar also confirmed the Long-Term and Short-Term Critical Obligations Ratings (COR) at BBB (low) / R-2 (middle) and the Trend remains Stable. This reflects DBRS Morningstar’s expectation that, in the event of a resolution of the Bank, certain liabilities (such as payment and collection services, obligations under a covered bond program, payment and collection services, etc.) have a greater probability of avoiding being bailed-in and are likely to be included in a going-concern entity. The Bank’s Deposit ratings were confirmed at BB (low)/R-4, 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 Intrinsic Assessment (IA) of the Bank is B (high) and the Support Assessment is SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The change of Trend to Stable reflects DBRS Morningstar’s view that the transfer of around EUR 7.5 billion of NPEs to the Italian state-owned bad loan manager Asset Management Co. SpA (AMCO) will improve BMPS’s asset quality and lower its non-performing exposures (NPE) ratio to around 4.0%, from 11.1% at end-September 2020, one of the lowest levels in Italy. BMPS is in the process of transferring EUR 4.9 billion of bad loans and EUR 2.6 billion of unlikely-to-pay loans (UTPs) to AMCO, a transaction we view as key to paving the way for a potential reprivatisation of the Bank. The transaction has received the authorisation by ECB, at the beginning of September, subject to certain conditions, that we understand BMPS should complete very soon, as the transaction is due to take place by December 1, 2020.

The rating action also incorporates the fact that, albeit credit positive for the Bank’s overall risk profile, the transaction will lower BMPS’s capital ratios by around 140 bps by end-2020, which would result in a lower buffer over SREP requirements. At end-September 2020, the Bank reported phased-in common equity tier 1 (CET1) and Total Capital ratios of 12.9% and 16.2% respectively. The rating action also takes into account that BMPS still faces around EUR 10 billion in potential litigation risks. Following the conviction of some of the Bank’s former executives for market rigging and accounting fraud, the Bank booked additional provisions in Q3 2020 for around EUR 0.4 billion to cover potential legal risks and triggered BMPS’s third consecutive loss. The rating action also reflects the fact that the wide scale economic and market disruption resulting from the coronavirus (COVID-19) pandemic will continue to put pressure on the Bank’s profitability and risk profile. All these elements have led the Bank to revise its capital plan in order to boost capital levels, which we view as adding new challenges and higher execution risk to the Italian government's exit from the Bank's shareholder base. The Ministry of Finance has to complete the exit by the end of the Bank's restructuring plan as agreed with the European authorities, which we understand should be by end-2021,

RATING DRIVERS

An upgrade would require the Bank to resolve the pending litigation issues, successfully dispose of NPEs, restore its capital levels and improve earnings.

A downgrade would likely be driven by a significant deterioration in the Bank’s profitability as a result of the global COVID-19 pandemic or other potential headwinds on capital. A downgrade could also occur should the Bank experience severe delays in its restructuring plan.

ESG CONSIDERATIONS

DBRS Morningstar views the Business Ethics and the Corporate/Transaction Governance ESG subfactors as significant to the credit rating. These are included in the Governance category. The Bank has suffered reputational damage from legacy conduct issues, in particular litigation risk linked to former capital increases, the conviction of the former executives of market-rigging and accounting fraud and the ongoing investigation regarding fraudulent sale of diamond by Italian banks. In addition, BMPS is 68% owned by the Italian State because of a precautionary recapitalisation which is subject to an EU restructuring plan.

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 Monte dei Paschi di Siena SpA are as follows: Franchise Strength – Moderate; Earnings – Weak/Very Weak; Risk Profile – Weak; Funding & Liquidity – Weak; Capitalisation – Weak/Very Weak.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/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, BMPS 2019 and 9M 2020 Reports, BMPS 2019 and 9M 2020 Press Releases, BMPS 2019 and 9M 2020 Presentations 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/370234.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Arnaud Journois, Vice President - European Financial Institutions
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: January 18, 2013
Last Rating Date: June 16, 2020

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