DBRS Morningstar Confirms Intesa Sanpaolo’s Issuer Ratings at BBB (high)/R-1 (low); Trend Remains Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Intesa Sanpaolo SpA (ISP, Intesa or the Bank), including the Long-Term Issuer Rating of BBB (high) and the Short-Term Issuer Rating of R-1 (low). The trend remains Negative. Concurrently, DBRS Morningstar maintained the Bank’s Intrinsic Assessment at BBB (high) and the support assessment at SA3.

In addition, DBRS Morningstar discontinued ISP’s “Cumulative Discretionary Pay Subordinated Debt” and “Non-Cumulative Discretionary Pay Subordinated Debt” ratings, and renamed the “Mandatory Pay Subordinated Debt” as “Subordinated Debt”. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of ISP’s ratings takes into account the Bank’s leading retail and commercial banking franchise in Italy which has further expanded with the acquisition of its smaller rival UBI Banca, its diversified business model and resilient earnings. Furthermore, DBRS Morningstar considered the Bank’s robust funding profile, its solid capital position, as well as the considerable progress that ISP has made in reducing its legacy stock of NPLs.

However, the large economic impact caused by the COVID-19 pandemic poses risks for the Bank’s asset quality and profitability. Whilst various support measures implemented by the government and regulators have prevented a significant build-up of NPLs for the time being, we expect some asset quality deterioration to materialise throughout 2021 and 2022 as support schemes are removed. However, the increase in NPLs is likely to be manageable in our view, if the vaccination campaign for COVID-19 proceeds unhindered and there is a resulting rebound in economic activity.

Intesa’s Long-Term Senior Debt ratings and Deposit ratings are both positioned in line with the sovereign rating of Italy. Given ISP’s domestic concentration and large exposure to Italian sovereign bonds, DBRS Morningstar considers that the Bank is unlikely to be rated higher than the Italian sovereign, which is currently rated at BBB (high)/R-1 (low) with a Negative trend. As a result, the ratings of Intesa are highly correlated with any changes made to the sovereign rating. The Negative trend is in line with the trend on DBRS Morningstar’s Italian sovereign rating.

RATING DRIVERS

Given the Negative trend, a rating upgrade for Intesa is unlikely at this time. However, the trend on the Long-Term ratings would change to Stable if the trend on the Italian Sovereign were to return to Stable, and the impact of the current economic environment on the Bank’s earnings and asset quality were to be manageable.

A downgrade of Intesa’s ratings would result from a downgrade of Italy’s Sovereign rating or a material deterioration in the Bank’s risk profile.

RATING RATIONALE

As Italy’s largest provider of financial services to businesses and individuals, Intesa plays a critical role in the Italian financial system and the country’s payment mechanisms. The Bank maintains a solid competitive position underpinned by its large domestic franchise, well diversified business model and solid reputation. Revenue diversification towards fee-driven activities, such as asset management, corporate and investment banking (CIB) and insurance, as well as strong cost discipline have been key drivers of the Bank’s resilient pre-provision income, particularly during this period of very low interest rates. In addition, with the integration of UBI Banca (UBI) fully completed in mid-April 2021, Intesa confirmed its solid track record in implementing post-acquisition integrations.

In Q1 2021, the Bank posted net income of EUR 1.5 billion, up 32% Year-on-Year (YoY) although Q1 2020 did not include UBI in the scope of consolidation. The results for the quarter showed lower revenue generation YoY on a like-for-like basis, mostly due to lower trading and financial income which, however, recorded a record-high in the prior year. Conversely, core revenues held up well on the back of increasing net fees from asset management, advisory, and dealing and placement of securities, and despite the ongoing pressure on net interest income. Cost control remained good with a cost-to-income ratio of 46.5% in Q1 2021, and the Bank's annualised cost of risk was 35 bps in Q1 2021, significantly down from 97 bps in FY 2020 which incorporated the provisions for COVID-19.

Despite the challenging operating and economic environment, the Bank continued to make progress in reducing its stock of gross NPLs which decreased by 41% YoY to EUR 20.7 billion as of end-March 2021 on a like-for-like basis, including EUR 0.5 billion of NPLs from the integration of UBI. As a result, the gross and net NPL ratios stood at 4.4% and 2.3% respectively at end-Q1 2021, down from 7.2% and 3.6% respectively reported one year earlier on a like-for-like basis.

In response to the outbreak, the Bank has continued to offer debt moratoriums and State-guaranteed loans. As of end-March 2021, Intesa's outstanding loans still subject to moratoria, including UBI, totalled around EUR 30 billion, accounting for around 6% of its total customer loan portfolio. Around EUR 31 billion of debt moratoriums had already expired since the onset of the pandemic, with a manageable default rate of 1.5%. In addition, the Bank has granted around EUR 38 billion in loans backed by State guarantees, equivalent to around 8% of total customer loan portfolio. Whilst these support measures have been a key factor in preserving asset quality, we expect NPL inflows to increase throughout 2021 and 2022 as support measures are removed. However, we believe the NPL increase will overall be manageable for ISP if vaccination continues to progress, fostering a rebound in economic activity, especially in the most vulnerable industries, such as tourism & hospitality, transportation, and retail commerce.

The Bank maintains a robust funding and liquidity profile underpinned by a large deposit base and its access to the international funding market has remained stronger than Italian peers, even during periods of stress. Whilst ISP’s recourse to ECB sources reached EUR 119 billion out of a maximum allowance of EUR 133 billion at end-Q1 2021, the Bank has also further diversified its wholesale issuances towards Senior Non-Preferred and Green bond instruments. At the same time, Intesa maintains a solid capital position with a pro-forma fully-loaded CET1 ratio of 15.7% and a Total Capital ratio, phased-in, of 19.5% in Q1 2021.

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 Intesa Sanpaolo SpA are as follows: Franchise – Strong; Earnings – Good; Risk Profile – Moderate; Funding & Liquidity – Strong / Good; Capitalisation – Good.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodologies are 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 and the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (31 May 2021) https://www.dbrsmorningstar.com/research/379424/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support.
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 Company Documents, Intesa Sanpaolo Q1 2021 Results Press Release, Intesa Sanpaolo Q1 2021 Results Presentation, Intesa Sanpaolo Q1 2021 Report, Intesa Sanpaolo Annual Reports 2016-2020, Intesa Sanpaolo 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/380036.

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: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: September 13, 2013
Last Rating Date: August 7, 2020

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