DBRS Morningstar Confirms Credito Valtellinese at BB (high)/R-3; Trend Remains Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Credito Valtellinese SpA (Creval or the Bank) including the Long-Term Issuer Rating of BB (high) and the Short-Term Issuer Rating of R-3. The trend on all ratings remains Stable. The Bank’s Deposit ratings were confirmed at BBB (low)/R-2 (middle), 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. DBRS Morningstar has also maintained the Bank’s IA at BB (high) and support assessment at SA3.

KEY RATING CONSIDERATIONS
The confirmation of the ratings takes into account the Group’s significant progress in reducing its non-performing exposures (NPEs), which has left the Bank with a much cleaner asset quality profile. Specifically, the Bank proceeded with an additional EUR 800 million of disposals in 2020, which brought the NPE ratio below the Group’s target for 2023. However, as for other Italian banks, we also take into account the likely formation of new NPEs this year, when moratoria expire.

The ratings also incorporate the Bank’s robust capital levels, which remains at the higher-end of its domestic peer group and well above regulatory requirements. We view the latter as key to absorb the potential fallout from the crisis. In addition, ratings are underpinned by the Bank’s solid small to medium sized franchise, with a meaningful presence in retail and commercial banking in the region of Lombardy, especially in its home province of Sondrio, and Sicily. The rating action also takes into account Creval’s solid retail funding base and sound liquidity profile.

Nonetheless, the ratings also take into account that, whilst profitability has improved, it still reflects core revenue pressure due to the low interest rate environment, the potential de-risking and the still high cost of credit. In addition, the ratings also reflect our expectation that Creval, as with other Italian banks, will likely experience pressure on earnings in the year ahead as a result of COVID-19.

RATING DRIVERS
An upgrade is unlikely whilst Italy is still experiencing the current challenging economic outlook. An upgrade of the Long-Term ratings would require the Bank to demonstrate sustained profitability whilst maintaining their current asset quality profile

A downgrade would be driven by a significant deterioration of the Bank’s profitability and asset quality. A material deterioration of capital buffers could also lead to a downgrade.

RATING RATIONALE

Creval is a small-medium sized retail and commercial bank, with a meaningful presence in Lombardy, especially in its home province of Sondrio, as well as in Sicily. The Bank is in the second year of its strategic plan for 2019-2023, which encompasses a larger contribution from retail business, especially fee-generating activities such as bancassurance as well as income from consumer lending. In addition, the Bank has been committed to improving efficiency and asset quality, which was already evidenced in 2020 despite the COVID 19 crisis, even achieving the targets ahead of the Bank's business plan. The Bank could be acquired in 2021 as Credit Agricole Italia, a 75.6% owned subsidiary of Crédit Agricole S.A., has made a voluntary public tender offer in cash for all ordinary shares of Creval for EUR 737 million. The process is still ongoing and we will be monitoring further developments regarding the potential acquisition. If the acquisition goes ahead, DBRS Morningstar anticipates Creval’s ratings would be upgraded to reflect the strengths of its new shareholder structure.

DBRS Morningstar notes the Bank’s profitability continued to improve despite the challenging operating environment which translated into revenue pressure and high cost of credit. In particular, a continued emphasis on cost reduction, with operating costs down 9% YoY, enabled the Bank to mitigate the negative effects of the COVID-19 crisis. However, we consider that Creval, as with other Italian banks, is likely to experience pressure on earnings in the year ahead, especially stemming from the still high cost of risk. Creval reported EUR 113.2 million net profit for FY 2020, doubling its net profit from FY 2019. This was mainly driven by lower provisions from a high base in FY 2019 due to the increase in coverage to facilitate NPE disposals finalised in FY 2020 as well as lower costs related to the Bank’s transformation plan which more than offset revenue pressure.

Creval’s risk profile continued to improve in 2020, now comparing favourably with its domestic peers. The total stock of NPEs continued to decrease to EUR 0.9 billion at end-2020, down from EUR 1.5 billion at end-2019, and the Bank executed several NPE sales for around EUR 800 million. As a result, the Gross NPE ratio improved to 5.8% from 9.4% at end-2019 (and 11.0% at end-2018). Net of provisions, the Bank’s net NPE ratio also improved to 3.1% at end-2020 from 4.7% a year earlier. However, we expect new NPEs will likely appear in 2021 with the ending of the support provided by the moratoria schemes.

DBRS Morningstar views Creval’s funding profile as solid, supported by its large deposit retail franchise. At end-2020, customer deposits and certificates of deposits accounted for 90% of the Bank’s total funding, up from 85% at end-2019. This is due to the increase in central bank deposits, especially TLTRO 3 amidst the COVID-19 crisis. Creval’s liquidity position remains adequate with a large stock of liquid assets amply covering retail and wholesale maturities.

DBRS Morningstar views as positive that Creval maintains ample cushions above its minimum capital requirements. The CET1 ratio (fully loaded) was 19.6% at end-2020 compared to 15.5% at end-2019, mostly thanks to retained earnings and risk-weighted asset (RWA) optimisation. The fully loaded Total Capital Ratio stood at 21.8% at end-2020 compared to 17.7% at end-2019.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Credito Valtellinese SpA are as follows: Franchise Strength – Moderate; Earnings – Weak; Risk Profile – Moderate / 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 (June 8, 2020). https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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, Creval 2020 Earnings Presentations, Creval 2020 Press Release, Creval ESG Presentation 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/375069

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

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: February 7, 2013
Last Rating Date: April 2, 2020

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