DBRS Morningstar Downgrades Monte dei Paschi Subordinated Debt on Increased Burden-Sharing Risk

DBRS Ratings GmbH (DBRS Morningstar) downgraded the Subordinated Notes rating of Banca Monte dei Paschi di Siena SpA (BMPS or the Bank) to CCC from B (low). The Trend remains Stable. In addition, DBRS Morningstar discontinued the Senior Non-Preferred rating for business reasons. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The downgrade of BMPS’s Subordinated Notes reflects the increased risk of burden-sharing on these instruments as the Italian government gets closer to finding an exit strategy for its ownership of BMPS. It also follows the announcement on July 29, 2021 that UniCredit SpA (UniCredit) will begin exclusive discussions with the Italian Ministry of Economy and Finance (MEF) for the potential acquisition of BMPS. This acquisition could lead to the exit of BMPS from Italian government ownership which MEF, BMPS’s majority shareholder, needs to complete by the end of the Bank's restructuring plan (which is expected by end-2021), as agreed with the European authorities.

UniCredit announced that they had already set out with the MEF a potential perimeter of acquisition, which encompasses around 3.9 million clients, EUR 80 billion customer loans, EUR 87 billion customer deposits, EUR 62 billion assets under management and EUR 42 billion assets under custody. In addition, pre-requisites have also been agreed upon in order for the transaction to take place, including the exclusion of non-performing loans and extraordinary disputes not relating to ordinary banking activities and all related legal risks.

Whilst this is early stages as the due diligence is still to be conducted, we note that such an outcome could be credit positive for BMPS’ senior debt holders and depositors. However, we consider there is an increased risk to liabilities that are not at this stage included in the acquisition perimeter, namely BMPS’ outstanding Tier 2 notes. The two-notch downgrade reflects that an acquisition of BMPS by a financial institution would likely require participation by the State in a further capital increase, which could lead to Subordinated instruments being subject to burden-sharing and a potential default.

BMPS has not issued Senior Non-Preferred Debt and consequently the ratings on BMPS’s Senior Non-Preferred Debt have been Discontinued-Withdrawn.

RATING DRIVERS

An upgrade of the Bank’s Issuer Rating would require the Bank to materially increase its capital buffers, resolve the pending litigation issues, and demonstrate recurrent profitability. An upgrade of the Bank’s Subordinated Notes would require them to be part of the perimeter acquired by UniCredit in the event of the transaction taking place.

A downgrade of the Bank’s Issuer Rating would likely be driven by a significant deterioration in the Bank’s profitability or materialisation of a higher than expected shortfall in capital. A further downgrade of the Bank’s Subordinated Notes would occur in the case of burden-sharing.

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. Nevertheless, we also note that the Bank is working to reduce the latter as demonstrated by the settlement of a EUR 3.8 billion claim with the Monte dei Paschi di Siena Foundation, which represented around 40% of the total legal risks. 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.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021)
https://www.dbrsmorningstar.com/research/381742/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 Company Documents, BMPS Q2 2021 Report, BMPS Q2 2021 Press Release, BMPS Q2 2021 Presentations, UniCredit Press Release about the potential acquisition from July 29, 2021 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/382847.

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: June 16, 2021

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