DBRS Morningstar Confirms Iccrea’s Issuer Ratings at BB (high)/R-3; Trend Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Iccrea Banca SpA (Iccrea or the Bank), including the Long-Term Issuer Rating of BB (high) and the Short-Term Issuer Rating of R-3. Concurrently, DBRS Morningstar confirmed the Bank’s Deposit ratings at BBB (low)/R-2 (middle), which is 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 all ratings is Stable. The Bank’s IA is BB (high) while the Support Assessment is SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings and the Stable trend take into account Iccrea’s key role as the central entity of Gruppo Bancario Cooperativo Iccrea (GBCI or the Group), the largest Italian cooperative banking group, its strong retail funding base underpinned by the stable access to the cooperative member banks’ (BCC) customer network, as well as the Group’s adequate capital position. In addition, DBRS Morningstar notes that the Group is making progress in reducing its large stock of legacy non-performing loans (NPLs) and simplifying its structure. These put the Group in a stronger position to withstand the expected asset quality deterioration due to COVID-19.

At the same time, we continue to view the Group’s profitability as modest considering the low contribution from fee income, modest operating efficiency and high loan loss provisions. In our view, the Group’s ongoing de-risking plan will likely keep the cost of risk high in the near term.

RATING DRIVERS

An upgrade would require further improvements in asset quality, while preserving adequate capital buffers. A sustained improvement in profitability would be also credit positive.

A downgrade would occur in the event of a significant formation of new NPLs or weakening of the capital buffers.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good/Moderate

Formed in March 2019, the Group is the largest cooperative network in Italy with 128 small cooperative banks as of October 2021 and total combined assets of around EUR 175 billion at end-June 2021. The Group has an extensive domestic footprint with over 2,500 branches and around 22,000 employees evenly distributed across Italy, serving over 3 million, mostly households and SME customers. Iccrea and the cooperative banks are tied by a cohesion agreement which creates a framework for more effective coordination and better controls within the Group as well as the potential for more consolidation and simplification of its complex structure.

Earnings Combined Building Block (BB) Assessment: Weak

We continue to view GBCI’s profitability as constrained by the low interest rate environment, the low contribution from diversification and fee-based income, as well as the modest operating efficiency and high loan loss provisions. In H1 2021 the Group reported net attributable income of EUR 400 million, up from EUR 122 million in H1 2020, and a Return on Equity (ROE) of 7.5% in H1 2021, up from 2.4% in H1 2020. The increase was largely due to higher revenues due to the large take-up of TLTRO 3 funds, lower funding costs and significant one-off gains from the sale of Italian government bonds and equity shareholdings. The cost-to-income ratio improved to 65.7% in H1 2021 from 71.6% in the same period last year, as calculated by DBRS Morningstar, despite operating expenses rising by 5% YoY. In H1 2021, GBCI’s annualised cost of risk remained unchanged YoY at 90 bps. In the near term, DRBS Morningstar expects impairment provisions to be elevated, given the ongoing NPL reduction plan, as well as the additional provisioning identified by the ECB under the Asset Quality Review (AQR) concluded in July 2021.

Risk Combined Building Block (BB) Assessment: Weak/Very Weak

The Group’s risk profile remains challenged, mostly impacted by a still large, albeit reducing, stock of NPLs. As of end-June 2021, GBCI reported EUR 8.3 billion in gross NPLs, down by 22% YoY, corresponding to a gross NPL ratio of 8.9% (or 4% net of provisions). We expect GBCI to make further process in reducing its stock of legacy NPLs via securitisations and disposals, although we would expect some impact on asset quality from the pandemic. The Group targets a reduction in the stock of gross NPLs to around EUR 6 billion by the end of 2023, which would imply gross and net NPL ratios falling to around 6.5% and 3.3% respectively, based on a total NPL coverage of 51%. As part of this plan, in November 2021 GBCI announced a NPL securitisation of EUR 1.3 billion using the GACS scheme.

Thus far, the level of new NPL inflows from the pandemic has been contained. The stock of loans under moratoria fell to around 7% of the Group’s total net customer loans as of September 2021, down from the peak of 26% one year earlier. Around 1.7% were classified as Stage 3 as of end-June 2021. At the same time, State-guaranteed loans provided by the Group were EUR 8.5 billion, accounting for around 10% of GBCI's net customer loans, up from 2% in H1 2020.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate

The Group maintains a stable funding position, mainly supported by the large retail deposit base of the BCC’s network. Access to the wholesale market is centralised via Iccrea Banca. In H1 2021, the Group had around EUR 103 billion in customer deposits (or 65% of GBCI's funding mix), up 14% YoY, mainly due to lower household consumption and higher corporate deposit inflows. Households remain the largest contributor to GBCI's deposit base, accounting for around 62% of the total. The Group continued to increase its exposure to the ECB and at end-June 2021 this accounted for 21% of total funding. With the aim to fulfil its MREL minimum requirements, the Bank issued a EUR 300 million Tier 2 subordinated bond in October 2021 and its inaugural Social Senior Preferred Bond (EUR 500 million) in November 2021. This falls within the Bank’s plans to issue around EUR 3.6 billion of MREL-eligible liabilities in 2021-2023. In addition, the Bank also issued EUR 500 million of covered bonds.

Capitalisation Combined Building Block (BB) Assessment: Moderate

GBCI’s capitalisation benefitted from the recent progress in the de-risking process, the supply of State-guaranteed loans, and the issuance of subordinated instruments. However, the Group’s capital position is constrained by the still high level of unreserved NPLs and modest internal capital generation. In H1 2021, GBCI reported its phased-in CET1 and Total Capital ratios, excluding the net income of the period as well as the recent Tier 2 issuance, at 16.5% and 17.2% respectively, up from 16.1% and 16.9% one year earlier, but down slightly compared to the 16.7% and 17.5% ratios at end-2020. The slight reduction in H1 2021 was mainly driven by the reduction in the phased-in positive impact as IFRS 9 continues to unfold. On a fully-loaded basis, the Group’s CET1 and Total Capital ratios stood at 15.4% and 16.1% respectively at end-June 2021. As a result, capital buffers over SREP minimum requirements were reported at 700 bps and 420 bps respectively for CET1 and Total Capital, excluding the ECB's temporary flexibility regime, as well as the opportunity to partly fulfil the Pillar 2 Requirement (P2R) by CET1 Capital.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/389146.

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.

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.

The sources of information used for this rating include Company Documents, Iccrea H1 2021 Report, Iccrea H1 2021 Results Press Release, Iccrea Annual Reports 2017-2020, Iccrea Non-Financial Statement 2020, 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/389145.

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: July 26, 2018
Last Rating Date: December 2, 2020

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