DBRS Morningstar Downgrades Iccrea’s Long-Term Issuer Rating to BB (high), Trend Now Stable

DBRS Ratings GmbH (DBRS Morningstar) downgraded the ratings of Iccrea Banca SpA (Iccrea or the Bank), including the Long-Term Issuer Rating, to BB (high) from BBB (low) and the Short-Term Issuer Rating to R-3 from R-2 (middle). The Bank’s Deposit ratings were downgraded to BBB (low)/R-2 (middle), which is 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 all ratings is now Stable. The Bank’s IA was also lowered to BB (high) from BBB (low) while the Support Assessment remains unchanged at SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The rating downgrade takes into account the large and abrupt economic disruption resulting from COVID-19 and the negative implications for asset quality, cost of risk and profitability. The structure of Gruppo Bancario Cooperativo Iccrea (GBCI or the Group) is relatively new and it will require time for its full integration and consolidation, and this will be more challenging in the current environment. In addition, despite the recent reduction in NPLs, the Group’s asset quality is still affected by a large stock of impaired loans and its NPL ratios continue to compare unfavourably with domestic and international peers. The Group has made extensive use of the moratoria, and these covered around 26% of GBCI’s net customer loans at end-June 2020, one of the highest levels across Europe. This support, however, is unlikely to prevent the formation of new NPLs. The deterioration is expected to be more visible from 2021 as moratoria periods run off and will likely result in higher loan loss provisions and further pressure on profitability. Moreover, in the current challenging environment, the execution of the Group’s NPL reduction plan might take longer than expected.

The trend change to Stable reflects our view that the Bank’s risks are broadly balanced at the BB (high) rating level. The Stable Trend considers the progress made in reducing the stock of NPLs, including the recent securitization of EUR 2.4 billion, as well as strengthened capital buffers.

RATING DRIVERS

Given the recent downgrade and the economic uncertainty from COVID-19, an upgrade is unlikely in the short-term. An upgrade would require a sustained improvement in profitability and asset quality.

A downgrade would likely be driven by a significant deterioration in the Bank’s asset quality and capital buffers.

RATING RATIONALE

Formed in March 2019, the Group is the largest cooperative network in Italy with 132 small cooperative banks as of October 2020 and total combined assets of around EUR 169 billion at end-June 2020. The Group has a strong domestic footprint with around 2,550 branches and around 22,000 employees evenly distributed across Italy, serving over 4 million customers, mostly households and SME clients. With the reform of the cooperative sector, we believe Iccrea and the cooperative banks are better positioned than previously. The cohesion agreement amongst members creates a framework for more effective coordination and better controls within the Group. At the same time, the guarantee scheme underpins the Group’s solvency and its financial stability. Nonetheless, this structure is relatively new and it will require time for its full integration and consolidation. Meanwhile, the disruption from the COVID-19 pandemic creates additional operational challenges, given the complexity of the Group and the high granularity of its customer base. Moreover, we believe that the already weak position of some cooperative banks will likely deteriorate further in the current challenging environment.

GBCI's modest profitability levels are impacted by low interest rates, weak operating efficiency and increasing cost of risk. In H1 2020, the Group reported net attributable income of EUR 122 million, down 32% compared to H1 2019, mostly due to higher loan loss provisions (LLPs) from ongoing de-risking and in anticipation of likely deterioration in asset quality due to COVID-19. LLPs increased by 48% year-on-year (YoY) whereas the cost of risk was reported at 90 bps, up from 63 bps in the same period of 2019. Total revenues were up 4% YoY, largely supported by gains from the sale of Italian government bonds. Whilst operating costs were down 2% YoY, the Group’s cost-to-income ratio remained high at 71.6%, as calculated by DBRS Morningstar.

The Group’s asset quality profile is impacted by a large, albeit declining, stock of NPLs. At end-June 2020, GBCI reported EUR 10.6 billion in gross NPLs, down 17% YoY, corresponding to a gross NPL ratio of 11.5% (or 5.9% net of provisions). In November, the Group completed a NPL securitisation of around EUR 2.4 billion (gross value) with use of the GACS (Garanzia sulla Cartolarizzazione delle Sofferenze) scheme. As a result, the pro-forma gross NPL ratio is expected to fall to around 10%, a level which is still higher than domestic and international peers. For the time being, the Bank’s asset quality does not yet fully reflect the impact from COVID-19. In our view, new NPLs are expected to be more visible from 2021 with the end of the support provided by the moratoria schemes.

The Group maintains a stable funding position, mainly supported by the large retail deposit base of the BCC’s network. Access to the wholesale market is centralised via Iccrea Banca. In H1 2020, the Group had EUR 90 billion in customer deposits (or 59% of GBCI's funding mix), up 3% compared to end-2019. The lockdown triggered a drop in household consumption and a subsequent increase in retail deposits. At the same time, several government support measures enabled businesses to drawdown additional borrowings, and part of this liquidity was placed on deposit. In 2020, similar to peers, the Group has increased its usage of ECB funding by around EUR 10 billion, following the large take-up of the new ECB TLTRO III program in June. The total ECB exposure totalled EUR 27 billion, or 18% of GBCI's funding mix. These funds were mainly used to purchase Italian sovereign bonds. As of June 2020, the Group’s Italian sovereign bond portfolio, which are mostly classified at HTC (Held to Collect), accounted for over 30% of total assets. In terms of access to capital markets, the Group has limited track record relative to its peers, given its recent creation. In October, Iccrea made another step towards building-up its future MREL buffers with the issuance of its inaugural senior preferred bonds.

GBCI’s capital buffers have strengthened on the back of the issuance of EUR 400 million of Tier 2 instruments in Q4 2019, along with a decline in risk-weighted assets (RWAs) in H1 2020, mostly supported by several relief measures in response to the pandemic, including State-guaranteed loans. As a result, GBCI reported its phased-in CET1 and Total Capital ratios at 16.1% and 16.9% respectively at end-June 2020, up from 15.5% and 15.8% one year earlier. On a fully loaded basis and taking into account the expected losses under the full-time adoption of IFRS 9, the Group’s CET1 and Total capital ratios stood at 14.7% and 15.4%. Nonetheless, we expect the Group’s capital position to be pressured by the still elevated level of unreserved NPLs and modest internal capital generation.

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 Iccrea Banca SpA are as follows: Franchise Strength – Good / Moderate; Earnings – Moderate / Weak; Risk Profile – Weak; 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 (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, Iccrea 2019 Annual Report, Iccrea H1 2020 Interim Report, Iccrea H1 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/370687.

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

Lead Analyst: Nicola De Caro, Senior Vice President, Global Financial Institutions Group
Rating Committee Chair: Ross Abercromby, Managing Director, Global Financial Institutions Group
Initial Rating Date: July 26, 2018
Last Rating Date: April 2, 2020

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