DBRS Morningstar Confirms BP Alto Adige’s LT Issuer Rating at BBB (low); Trend Revised to Stable from 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), and changed the trend to Stable from Negative. The Bank’s Intrinsic Assessment (IA) is maintained at BBB (low) and the Support Assessment at SA3.

The Bank’s BBB Long-Term Deposit rating is 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 Bank’s Short-Term Deposit rating is R-2 (high). See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings and the trend change to Stable from Negative takes into account the progress that BPAA has made in reducing non-performing loans (NPLs) and strengthening capital buffers. The ratings continue to reflect the Bank’s stable franchise in its home region of Trentino-Alto Adige and its stable funding and liquidity position, but also its modest underlying profitability, mainly constrained by the low interest rate environment, limited revenue diversification and modest operating efficiency. We expect earnings to return to more normalised levels when excluding significant one-off trading gains reported in 2021.

Asset quality deterioration from the almost entirely expired moratoria has been less pronounced than previously anticipated on the back of a better than expected recovery in the local economy. Downside risk for asset quality is contained in our view should the pandemic remain under control, however there might be pressure in the medium to long term given the uncertainty resulting from high and persistent inflationary pressures.

RATING DRIVERS

An upgrade would require sustained improvements in the Bank’s profitability metrics and a further reduction in the level of NPLs, while maintaining sound capital buffers.

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

RATING RATIONALE

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

With approximately EUR 13 billion of total assets at YE 2021, BPAA maintains a stable market position in the wealthy autonomous region of Trentino-Alto Adige / Südtirol. 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. The Bank also has a small presence in the neighbouring region of Veneto stemming from the 2015 acquisition of Banca Popolare di Marostica.

Earnings Combined Building Block (BB) Assessment: Moderate/Weak

BPAA's earnings profile generally reflects modest margins, limited revenue diversification, weak efficiency levels and the still high, albeit reduced, stock of NPLs. Core revenues in 2021 exceeded their pre-pandemic level and loan loss provisions decreased as the deterioration in asset quality due to the pandemic was less pronounced than initially anticipated. In 2021, BPAA reported a net profit of around EUR 70 million, up from EUR 16 million a year earlier, although this was mainly driven by non-recurring gains from the sale of Italian government bonds. The Bank's efficiency levels remained weak in 2021 with a cost-to-income ratio of around 75% (as calculated by DBRS Morningstar on core revenues), while the cost of risk was 74 bps, down from 87 bps in 2020 and 107 bps in 2019. The Bank’s Return on Equity (ROE) exceeded 8% in 2021, up from 2% in 2020, but we expect it to return to more normalised levels when excluding the one-off trading gains realised in 2021.

Risk Combined Building Block (BB) Assessment: Moderate

Despite the challenging operating and economic environment the Bank continued to make progress in reducing its stock of gross NPLs which decreased by 9% in 2021 to EUR 448 million, driven by disposals and securitisations. As of end-2021, BPAA’s gross and net NPL ratios were 5.8% and 2.8% respectively, down from 6.4% and 3% at end-2020. These levels, however, continue to remain high compared to European peers.

Deterioration in asset quality from the expiry of over EUR 2 billion of debt moratoriums granted during the pandemic has been manageable to date, mainly reflecting the better than expected recovery in the local economy. The sectors most impacted by the pandemic, such as tourism and hospitality, and retail and manufacturing, have since been recovering. However, we note that Stage 2 loans (i.e. loans whose credit risk has increased since origination), represented 12% of total gross customer loans as of end-2021, up from 11% at end-2019. This has also led to an increase in the coverage ratio for the performing loan portfolio to 1.2% from 0.8% in the same period. Downside risk for asset quality is contained in our view should the pandemic remain under control, however there might be pressure in the medium to long term given the uncertainty resulting from high and persistent inflationary pressure.

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

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-2021, the Bank’s deposits increased by 13% YoY to EUR 8.1 billion, accounting for over 88% of its direct funding from customers. In addition, BPAA’s exposure to the ECB’s TLTRO 3 funding program reached EUR 2.5 billion as of end-2021, up 42% YoY and representing over 20% of total funding. BPAA maintained solid funding and liquidity ratios at end-2021, with its Liquidity Coverage Ratio (LCR) above the minimum requirement, Net Stable Funding Ratio (NSFR) above 130%, and a pool of liquid assets and readily available liquidity totalling EUR 3 billion.

Capitalisation Combined Building Block (BB) Assessment: Moderate/Weak

BPAA’s capital ratios strengthened in 2021, driven by both retained earnings and a reduction in risk-weighted assets (RWAs). The Bank’s phased-in common equity tier 1 (CET1) and Total Capital ratios were 15.7% and 18.2% respectively as of end-2021, up from 14.5% and 17% a year earlier, and well above the regulatory minima of 7.7% and 11.75%, excluding the ECB's flexibility regime on capital ratios which will end in 2023. The capital ratios incorporate the payment of around EUR 30 million of dividends paid in April 2022, equivalent to a pay-out ratio of around 43% of net income reported in 2021. On a fully-loaded basis, the CET1 and Total Capital ratios stood at 14.6% and 17.2% respectively. Nonetheless, we continue to see the Bank’s fragmented shareholder base and its modest internal capital generation as constraints to its ability to improve its capital position.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/396861.

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 Morningstar Inc. and Company Documents, Banca Popolare dell’Alto Adige 2017-2021 Annual Reports, and Banca Popolare dell’Alto Adige 2021 Non-Financial Statement. 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/396862.

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 21, 2021

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