DBRS Morningstar Confirms Banco BPM’s Issuer Ratings at BBB(low)/R-2(middle); Trend Remains Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banco BPM SpA (BBPM 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 Intrinsic Assessment (IA), reflecting the legal framework in place in Italy which has full depositor preference in bank insolvency and resolution proceedings. The trend on the Group’s long-term and short-term ratings remains Negative. DBRS Morningstar has also maintained the IA of the Bank at BBB (low) and the Support Assessment at SA3.

As part of this rating action, DBRS Morningstar also confirmed the BBB (low) / R-2 (middle) Issuer Ratings of Banca Akros SpA, the corporate and investment banking subsidiary of BBPM SpA. Banca Akros is a core component of BBPM’s franchise and, therefore, DBRS Morningstar has maintained a support assessment of SA1, which implies strong and predictable support from the Parent. As a result, the ratings of Banca Akros are at the same level as the Group. The trend on Banca Akros’s long-term and short-term ratings also remains Negative. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The Negative Trend continues to incorporate the heightened risks and uncertainty to the Italian economy caused by the global coronavirus pandemic (COVID-19) and the implications for Italy’s operating environment and our expectation that it will affect the Bank’s revenues, asset quality and cost of risk. In particular, we expect the impact on asset quality to materialise from 2021, following the end of the moratoria schemes. Downward rating pressure would intensify should the economic crisis be prolonged.

The confirmation of the ratings takes into account the significant progress that the Group has made since 2017 in reducing its non-performing exposures (NPEs), which has left the Bank with a much cleaner asset quality profile. We expect NPEs to decrease further in the short-term through the planned disposals of legacy NPEs. This will help to offset the impact from potential new NPE inflows driven by the economic impact of COVID-19.
The ratings also incorporate the Bank’s solid market position across the wealthy regions in Northern Italy, reinforced by measures to streamline the operating structure. The ratings continue to be underpinned by the Bank’s solid capital buffers, as well as solid funding and liquidity profiles. However, the ratings also take into account the Bank’s still high stock of NPEs as well as the modest profitability, which reflects core revenue pressure due to the persistent low interest rate environment, the ongoing de-risking and the high cost of credit.

RATING DRIVERS

Any upgrade is unlikely in the short-term given the negative trend. However, the trend could revert to Stable if the Bank were able to demonstrate sustained improvement in core revenues despite the global COVID-19 pandemic and limited asset quality impact.

The ratings could be downgraded should the Bank’s profitability face a material decline. A downgrade could also occur if much of the progress in asset quality made by the bank so far were to be reversed. A significant weakening of the capital base could also lead to a downgrade.

RATING RATIONALE

BBPM is the third largest Italian bank with EUR 186.7 billion in total assets at end-September 2020. The Group was formed from the merger of former Banco Popolare and former Banca Popolare di Milano on January 1, 2017. The Banco BPM franchise is underpinned by solid market shares in Northern Italy, especially across the wealthy regions of Lombardy, Veneto and Piedmont.

Profitability remains modest, reflecting the ongoing core revenue pressure and the high cost of risk related to the challenging environment despite improving operating efficiency. Net interest income was down 2.2% YoY in 9M 2020, affected by the ongoing low interest rate environment and the lower contribution from NPEs resulting from recent disposals, although this was partially compensated by the positive contribution from TLTRO loans. Fees and commissions also decreased 7.3% YoY in 9M 2020, largely resulting from the lockdown during Q1 and Q2 2020. Operating costs were down 6.0% YoY in 9M 2020, as the Bank’s efficiency levels benefited from cost containment actions, including lower variable remuneration and one-off COVID 19-related savings . As a result, BBPM’s cost-to-income ratio improved to 59.1% for 9M 2020 from 62.0% in 9M 2020. Loan loss provisions (LLP) increased to EUR 800.6 million from EUR 558 million in 9M 2020, mostly due to provisions to incorporate the future deterioration in economic conditions driven by the COVID-19 pandemic and to some additional NPE disposals totalling EUR 1.2 billion scheduled by year-end 2020. As a result, they absorbed 63.1% of Income before Provisions and Taxes (IBPT) in 9M 2020 (vs. 46.8% in 9M 2019). As a result, the cost of risk increased to 98 bps in 9M 2020 from 69 bps in 9M 2019, a level in line with the average for most domestic peers.

In recent years, the Bank has made significant progress in reducing its NPEs, mostly though disposals and securitisations, however, its asset quality profile remains relatively weak. In Q3 2020, the Bank announced the disposal of around EUR 1 billion of Unlikely to Pay (UTP) loans and the securitisation of around EUR 200 million of bad loans using the Italian GACS scheme. The total stock of NPEs decreased to EUR 9.8 billion at end-September 2020 from EUR 10.1 billion at end-2019 and the Gross NPE ratio decreased to 8.6% from 9.1% at end-2019, and it is expected to fall to 7.7% incorporating the planned disposals. However, this does not yet reflect the likely formation of new NPEs due to the economic impact of COVID-19. In our view, the impact will likely appear in 2021 with the end of the support provided by the moratoria schemes.

DBRS Morningstar views BBPM’s funding profile as solid, supported by a large and stable deposit base which accounted for approximately 81% of the Bank’s funding at 9M 2020. In addition, DBRS Morningstar views as positive that the Bank has diversified its funding sources and reinforced its total loss absorption capacity through issuances on the wholesale markets. The Bank maintains a solid liquidity position, with total eligible assets of around EUR 64.0 billion as at end-September 2020, of which EUR 26.5 billion were from TLTRO III and EUR 22.1 billion were unencumbered eligible assets. In addition, the Bank reported LCR and NSFR ratios amply above requirements at end-September 2020.

The Bank’s capital position was reinforced through issuances in 2019 and 2020 which has helped to diversify the capital base. The Bank maintains ample capital cushions over its SREP requirements of around 700 bps for common equity tier 1 (CET1) and 640 bps for Total Capital. As of 9M 2020, the Bank’s reported fully loaded CET1 ratio was 14.1% and Total Capital ratio was 17.8%.

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 Banco BPM SpA are as follows: Franchise Strength – Good; Earnings – Moderate/Weak; Risk Profile – Moderate/Weak; Funding & Liquidity – Good; Capitalisation – Moderate.

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, BBPM 9M 2020 Presentation, BBPM 9M 2020 Financial Data, BBPM 9M 2020 Press Release 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/370320

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

Lead Analyst: Arnaud Journois, Vice President – Global FIG
Rating Committee Chair: Ross Abercromby - Managing Director - Global FIG
Initial Rating Date: January 5, 2017
Last Rating Date: April 2, 2020

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