DBRS Morningstar Confirms BP Alto Adige’s LT Issuer Rating at BBB (low), 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 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 Bank’s long-term and short-term ratings remains Negative. The IA of the Bank is maintained at BBB (low) and the Support Assessment at SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

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 its progress to reduce Non-Performing Loans (NPLs) and strengthen capital buffers.

Nevertheless, in maintaining the Negative Trend, DBRS Morningstar continues to take into account the Bank’s modest profitability levels which are constrained by the low interest rate environment, low operating efficiency, and the high cost of risk stemming from ongoing de-risking and increased provisions in anticipation of future asset quality deterioration resulting from COVID-19.

BPAA has a significant credit exposure to SMEs. Some SMES, especially those operating in, or related to, the tourism and hospitality sectors have been highly impacted by lockdowns and restrictions on mobility. For the time being, various support measures, including guarantees and moratoria have helped to mitigate the economic fallout. However, we expect some asset quality deterioration to emerge throughout 2021 and 2022 as the support schemes are removed. This increase in NPLs could, however, be contained in our view, if the economy recovers with the progress of the vaccine rollout plan.

RATING DRIVERS

An upgrade is unlikely at this time given the Negative Trend. However, the Trend would revert to Stable if the Bank demonstrates limited earnings and asset quality impact in the current environment whilst maintaining sound capital buffers.

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

RATING RATIONALE

With around EUR 12 billion of total assets at YE 2020, BPAA maintains a stable 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 across sectors such as tourism and hospitality.

BPAA's earnings profile generally reflects modest customer margins, limited revenue diversification, low efficiency levels and the still high stock of NPLs. The global pandemic contributed to lower core revenue generation in 2020, especially fees and commissions, due to lower business volumes, as well as leading to continued high provisions to strengthen its loan reserve coverages. In 2020, BPAA reported a net profit of around EUR 16 million, stable Year-on-Year (YoY) when excluding a goodwill impairment of around EUR 100 million in 2019, largely attributable to the acquisition of Banca Popolare di Marostica Group (around 60%). The Bank's efficiency levels remained weak with a cost-to-income ratio of 76.4% (as calculated by DBRS Morningstar on core revenues), while the cost of risk was 87 bps, down from 107 bps in 2019. The Bank’s Return on Equity (ROE) remained at a low 2% in 2020.

Despite the challenging operating and economic environment, in 2020, the Bank continued to make progress in reducing its stock of gross NPLs which decreased by 12% YoY to EUR 491 million, driven by disposals and securitisations. BPAA’s gross NPL ratio declined to 6.4% from 7.4% at end-2019, whereas the net NPL ratio was 3%, down from 3.6%. These levels, however, continue to remain high compared to the European peers.

For the time being, debt moratoriums and State-guaranteed loans have helped to prevent a material build-up of NPLs, especially across the most vulnerable industries, such as tourism & hospitality. Nonetheless, we expect NPL inflows to increase throughout 2021 and in 2022, with the easing of support measures. A key rating factor will be whether BPAA is able to manage this likely deterioration in asset quality.

DBRS Morningstar considers BPAA’s funding profile as stable, benefiting from its large and growing deposit base with retail and SME clients. As of end-2020, the Bank’s deposits increased 13% YoY to EUR 7.2 billion, amidst lower retail consumption and higher liquidity buffers held by corporates as a result of COVID-19 uncertainty. In addition, the Bank has benefitted from the new ECB TLTRO funding program. BPAA maintained a solid liquidity position at end-2020, with its Liquidity Coverage Ratio (LCR) of 229%, Net Stable Funding Ratio (NSFR) above 100%, and a pool of liquid assets of EUR 2.5 billion, including unencumbered ECB eligible assets.

The Bank’s capital ratios strengthened in 2020, driven by a reduction in RWAs. The Bank’s CET1 ratio (phased-in) stood at 14.5% at end-2020, up from 12.7% at end-2019. Similarly, the Total Capital Ratio (phased-in) increased to 17% from 14.9% a year earlier. On a fully-loaded basis, the CET1 and Total Capital ratios stood at 13.6% and 16% respectively, up from 11.9% and 14.1%. Nonetheless, we continue to see the Bank’s fragmented shareholder base and its modest internal capital generation as constraints to its ability to improve the capital position.

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 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 (8 June 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 (3 February 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 Banca Popolare dell’Alto Adige 2016-2020 Annual Reports, Banca Popolare dell’Alto Adige 2020 Non-Financial Statement, 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/378831.

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

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: May 26, 2020

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