DBRS Morningstar Confirms Banca Monte dei Paschi di Siena’s Ratings at B (high); Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banca Monte dei Paschi di Siena SpA (BMPS or the Bank) including the Long-Term Issuer Ratings of B (high) and the Short-Term Issuer Ratings of R-4 following an annual review of the Bank’s credit profile. DBRS Morningstar also confirmed the Long-Term and Short-Term Critical Obligations Ratings (COR) at BBB (low) / R-2 (middle) and the trend remains Stable. This reflects DBRS Morningstar’s expectation that, in the event of a resolution of the Bank, certain liabilities (such as payment and collection services, obligations under a covered bond program, payment and collection services, etc.) have a greater probability of avoiding being bailed-in and are likely to be included in a going-concern entity. The Bank’s Deposit ratings were confirmed at BB (low)/R-4, one notch above the 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 remains Stable. DBRS Morningstar has also maintained the Intrinsic Assessment at B (high) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings takes into account the Group’s large transfer of non-performing exposures (NPE) to the Italian state-owned bad loan manager Asset Management Co. SpA (AMCO) in Q4 2020. Thanks to this operation, we consider that the Bank’s risk profile as much improved, with NPE levels amongst the lowest in Italy. In addition, we consider the cleaner balance sheet will enable the Bank to improve its overall profitability and that the transaction will be an important stepping stone that could lead to a successful exit from the Italian government ownership. The Ministry of Finance needs to complete the exit by the end of the Bank's restructuring plan as agreed with the European authorities. Nevertheless, we still expect the Bank will see the formation of new NPEs due to the economic impact of COVID-19 in 2021, following the end of the support measures, including the moratoria schemes.

The Long-Term ratings of B (high) continue to reflect BMPS’s weak profitability. The Bank returned to profit in Q1 2021 after five consecutive quarters of losses, but this level could be difficult to maintain in the current environment and in light of the challenges that BMPS continues to face. The ratings also incorporates the Bank’s stable funding and liquidity profile, with the Bank having accessed the wholesale markets in 2020 through issuances of Senior and Tier 2 bonds, despite the crisis.

The ratings also take into account the Bank’s vulnerable capital position. De-risking, the transfer of NPEs to AMCO, the impact from COVID-19 and increased litigation risks have contributed to lower capital ratios and the expected increase of risk-weighted assets (RWAs) could lead to further capital needs.

RATING DRIVERS

An upgrade would require the Bank to materially increase its capital buffers, resolve the pending litigation issues, and demonstrate recurrent profitability.

A downgrade would likely be driven by a significant deterioration in the Bank’s profitability or materialisation of a higher than expected shortfall in capital.

RATING RATIONALE

BMPS is Italy’s fourth largest bank by total assets and has a significant market share in its home region of Tuscany. The Bank is currently undertaking a restructuring plan for 2017-2021, following the approval of the Italian State’s precautionary recapitalisation of the Bank in 2017. As part of this plan, BMPS has continued to improve efficiency with the closure of branches and headcount reduction. In addition, the Bank transferred more than EUR 7 billion of NPEs to the Italian bad bank, AMCO, which resulted in a cleaner balance-sheet. We see the transfer as essential for the Italian Ministry of Finance (MEF), which is BMPS’s main shareholder with a 64% stake, to find an exit solution. However, we also recognise that the Bank’s franchise has suffered reputational damage from legacy conduct issues, in particular litigation risk linked to former capital increases and the conviction of former executives of market-rigging and accounting fraud. As a result, BMPS still faces around EUR 10 billion in potential legal risks and threatened litigations.

After five consecutive quarters of losses, the Bank reported a net profit of EUR 119 million in Q1 2021 compared to a net loss of EUR 239 million in Q1 2020. This was mainly driven by lower provisions, continued cost control and higher revenues. Total revenues were up 13% YoY, mainly due to higher income from trading and financial assets at fair value, which benefited from higher gains on the sale of securities. However, Net Interest Income (NII) decreased 14.5%, still affected by persistent low interest rate environment, the deconsolidation of non-performing exposures and higher cost of deposits at central banks albeit compensated by the positive contribution from TLTRO III. Fees and commissions continued to recover and were up YoY, driven by higher income in wealth management, especially in product placement. BMPS continued to maintain its track record in improving its cost control and the cost-to-income ratio (as calculated by DBRS Morningstar) was 64.3% compared to 64.5% in Q1 2020. DBRS Morningstar expects cost discipline to remain a key driver to ensure enough flexibility to the Bank amid the current challenging operating environment. Loan loss provisions were much reduced YoY to EUR 77 million compared to EUR 315 million in Q1 2020 when the Bank booked EUR 193 million of provisions related to the revision of the macroeconomic scenario for COVID-19. Excluding the latter, provisions were still down YoY thanks to the lack of provisioning on NPEs which were transferred to AMCO in Q4 2020. As a result, the annualised cost of risk stood at 37 bps compared to 90 bps for FY 2020, which still included provisions related to the NPEs transferred to AMCO and ones related to COVID-19.

The Group’s asset quality improved significantly following the transfer of over EUR 7 billion of NPEs to AMCO. The Group’s gross NPL ratio stood at 4.4% at end-March 2021 from 12.4% at end-2019 and 17.3% at end-2018, whilst the net NPL ratio slightly improved to 2.4% from 6.8% and 9.0% in the same periods.

BMPS’s funding position has stabilised in recent years. BMPS is largely funded by deposits from retail and corporate clients. Whilst access to wholesale markets remains expensive, the Bank has accessed the wholesale market in 2020 with EUR 1.5 billion of Senior Bonds, and EUR 700 million of Tier 2 Instruments. At end-March 2021, the Bank maintained an acceptable liquidity position with an unencumbered counterbalancing capacity of EUR 31.0 billion, corresponding to circa 21% of the Bank’s total assets. LCR and NSFR were reported at above 150% and above 100% respectively at end-March 2021.

We continue to view the Bank’s current capital buffers as weak. De-risking, the transfer of NPEs to AMCO, the impact from COVID-19 and increased litigation risks have contributed to lower capital ratios and the expected increase of risk-weighted assets (RWAs) could lead to a shortfall in 2022 of EUR 1.5 billion. We note that the Bank has executed several capital management actions since November 2020 which have led to a reduction in the potential shortfall by EUR 500 million to around EUR 1 billion. In addition, we also note that the Italian government has the possibility to support BMPS for a potential capital increase of up to EUR 1.5 billion. At end-March 2021, BMPS reported a fully loaded Common Equity Tier 1 (CET 1) ratio of 10.4%, up 50 bps from end-2020, mainly resulting from the capital management actions but excluding the income for Q1 2021, prudentially not included in the ratios. This continues to provide the Group with an adequate buffer over the Overall Capital Requirement (OCR) for CET1 (phased-in) ratio which of 8.74%. The fully loaded Total capital ratios stood at 14.1% at end-March 2021, which provides a weak buffer over the minimum OCR for total capital of 13.44%. The potential shortfall could materialise from the Tier 1 which stood at 10.4% (fully loaded) at end-March 2021 compared to a SREP of 10.75%. All phased-in ratios were above regulatory requirements at end-March 2021.

ESG CONSIDERATIONS

The Governance factor does affect the ratings or trend assigned to BMPS. In particular, we view the Business Ethics and the Corporate/Transaction Governance ESG subfactors as significant to the credit rating. These are included in the Governance category. The Bank has suffered a reputational impact from legacy conduct issues, in particular litigation risk linked to former capital increases. In addition, BMPS is 64% owned by the Italian State because of a precautionary recapitalisation which is subject to an EU restructuring plan. As a result, these risks are incorporated in the Bank’s Franchise and Risk Profile grid grades.

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 Monte dei Paschi di Siena SpA are as follows: Franchise Strength – Moderate; Earnings – Weak/Very Weak; Risk Profile – Weak; Funding & Liquidity – Weak; Capitalisation – Weak/Very Weak.

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, BMPS 2020 and Q1 2021 Reports, BMPS 2020 and Q1 2021 Press Releases, BMPS 2020 and Q1 2021 Presentations 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/380178.

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

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: January 18, 2013
Last Rating Date: November 19, 2020

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