DBRS Morningstar Confirms BPER Banca’s Issuer Ratings at BBB/R-2 (high); Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of BPER Banca S.p.A. (BPER or the Bank), including the Long-Term Issuer Rating of BBB and the Short-Term Issuer Rating of R-2 (high). The Bank’s Long-Term Deposits Rating is BBB (high), 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 BBB, while its Support Assessment is SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of BPER’s ratings and the Stable trend takes into account the Bank’s well established franchise in Italy which has been benefiting from an improved market position as well as higher business and geographic diversification thanks to recent acquisitions. The execution of these integrations has been well managed in DBRS Morningstar’s view enabling BPER to pursue its national scale multi-specialist bank model while achieving value creation through synergies. DBRS Morningstar also notes the continued progress made by the Bank in improving its asset quality which has significantly accelerated in recent years, also driven by the disposal of BPER’s bad loan internal management unit as well as external partnerships. In DBRS Morningstar’s view, this will help BPER mitigate the potential negative implications for asset quality due to higher interest rates, high inflation, and weaker economic prospects.

The ratings are also underpinned by the Bank’s adequate capital, and funding and liquidity position which leverages off its ample retail customer deposit base. Nonetheless, the ratings still take into account BPER’s moderate underlying profitability which is primarily constrained by modest operating efficiency and higher than average credit costs. However, DBRS Morningstar expects the Bank’s core earnings power to improve in the foreseeable future, supported by higher interest rates and lower credit costs compared to their recent average level.

RATING DRIVERS

An upgrade of BPER’s Long-Term Issuer Rating would require a material improvement in the Bank’s underlying profitability while maintaining its current risk profile and sound capital buffers.

A downgrade of BPER’s ratings would likely be driven by a significant deterioration in the Bank’s asset quality or capitalisation.

RATING RATIONALE

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

BPER is the fourth largest banking group in Italy with around EUR 151 billion in total assets at end-March 2023, mainly providing traditional banking services to individuals and corporates, mostly SMEs, as well as corporate and investment banking, private banking, asset & wealth management, insurance, leasing and factoring. BPER completed several transactions in recent years as part of its strategy to strengthen its market position and regulatory capital, de-risk its balance sheet, streamline its structure, and benefit from synergies. The Bank has material market shares in its home region of Emilia Romagna, as well as in Southern Italy and Sardinia, and its market position has improved throughout Italy, especially in Lombardy, Liguria and Tuscany on the back of the integrations of the Intesa Sanpaolo-UBI Banca branch network, and Banca Carige. BPER’s main shareholder, Unipol Group, holds around 20% of its share capital, and plays a critical role for its bancassurance business model in addition to being a supportive shareholder.

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

BPER’s profitability has generally reflected modest margins but a well-diversified revenue mix, as well as relatively modest operating efficiency and high credit costs. The Bank’s core earnings power will likely improve going forward, driven by higher interest rates and lower loan loss provisions (LLPs). However, increased funding costs as well as high inflation and potential new risks to asset quality will likely absorb part of the benefit. The Bank reported a net attributable profit of around EUR 291 million in Q1 2023, more than 2.5 times higher than in Q1 2022, thanks to higher revenues, partly offset by increased operating expenses and LLPs. Core revenues (net interest income and net fees) were up 50% Year-On-Year (YOY) in Q1 2023, mainly supported by higher interest rates and the Bank’s higher perimeter which more than offset the lower contribution from TLTRO III, higher funding costs, lack of contribution from the merchant acquiring business, and negative momentum in the financial markets. Operating efficiency improved with a cost-to-income ratio of 58% in Q1 2023 (66.5% if calculated on core revenues), down from 70% in Q1 2022. BPER’s annualised cost of risk was 63 bps in Q1 2023, up from 49 bps in Q1 2022, but in line with 64 bps in FY 2022.

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

BPER’s stock of gross non-performing exposures (NPEs) has reduced markedly in recent years, driven by disposals, internal workout and higher recoveries. As a result, the Bank’s gross and net NPE ratios fell to 3.3% and 1.3% respectively at end-Q1 2023 (or 2.6% and 1.1% pro-forma for additional de-risking finalised in April-May 2023) from 13.8% and 6.8% at end-2018. These levels compare now more favourably with European peers. BPER’s annualised default rate was 1% in Q1 2023, slightly up from 0.8% in 2022, and has remained around these levels recently, despite the end of support measures granted due to COVID-19, higher interest rates and high inflation. At end-Q1 2023, net customer loans were up 14% YOY, but down 2% Quarter-On-Quarter (QOQ) mainly due to liquidity usage from corporates and the first signs of slowdown in new loan volumes. Stage 2 loans (loans where credit risk has increased since origination) were 11% of net loans at end-March 2023, up from 10% at end-2021 due to worsened macroeconomic assumptions. The potential risk for BPER from former Carige’s legal risks remains limited in DBRS Morningstar’s view.

Around 94% of BPER’s EUR 31 billion financial asset portfolio consisted of debt securities at end-March 2023 and around 70% of the total was reclassified at amortised cost (AC). Due to the increase in interest rates, the fixed income securities at AC were carrying unrealised losses of around EUR 1.1 billion at end-March 2023, or 211 bps in terms of capital.

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

DBRS Morningstar sees BPER’s funding profile as solid, with its retail customer base accounting for 75% of total direct funding as of end-March 2023. Despite some corporate deposit outflows in Q1 2023, the Bank’s net loan-to-deposit ratio was around 90% at end-Q1 2023, as calculated by DBRS Morningstar. BPER’s exposure to the ECB was 11% of total funding at end-March 2023, down from 15% one year earlier due to repayments. 64% of the ECB exposure expired in June 2023, with the remainder falling due in September 2023 and March 2024. Repo transactions were 5% of BPER’s total funding at end-March 2023. The Bank’s access to capital markets is satisfactory with around EUR 7 billion of debt securities outstanding as of end-March 2023 or 5% of total funding, of which more than EUR 3 billion were issued since 2022 to replace the phase-out of TLTRO III funds and to fulfil MREL regulatory requirements. BPER’s liquidity profile was supported by ample deposits with the ECB at end-March 2023 as well as EUR 15 billion of unencumbered ECB eligible assets, a Liquidity Coverage Ratio (LCR) of 206.3% and a Net Stable Funding Ratio (NSFR) of 126.5%.

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

In DBRS Morningstar’s view, BPER maintains an adequate capital position despite the Risk-Weighted Asset (RWA) inflation from recent acquisitions and moderate internal capital generation. As of end-March 2023, the Bank reported a fully loaded CET1 ratio of 13.3% and a fully loaded Total Capital ratio of 17%, up from 12% and 15.7% respectively at end-2022, mostly due to the conversion of Carige’s on-balance Deferred Tax Assets (DTAs) into tax credits, retained earnings, and positive RWA dynamics which more than offset the negative impact due to regulatory headwinds. The current level of capital ratios provides solid buffers of 490 bps and 380 bps respectively for CET1 and Total Capital ratios over the SREP minimum requirements which incorporate a Pillar 2 Requirement (P2R) of 2.6%, up from the previous 2.3%. In May 2023, BPER paid around EUR 170 million in dividends, equivalent to 12% of net income reported in 2022 or 34% excluding one-off items, consistent with its strategy to increase shareholder remuneration up to around 50% throughout the strategic plan.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/417323.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (4 July 2023).

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (22 June 2023). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, BPER Q1 2023 Results Press Release, BPER Q1 2023 Results Presentation, BPER Q1 2023 Report, BPER 2018-2022 Annual Reports, BPER 2022-Q1 2023 Pillar 3 Reports, BPER 2022 Sustainability Report, and BPER 2022 TCFD Report. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/417321.

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

Lead Analyst: Andrea Costanzo, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of Global FIG
Initial Rating Date: July 28, 2022
Last Rating Date: July 28, 2022

DBRS Ratings GmbH
Neue Mainzer Straße 75
Tel. +49 (69) 8088 3500
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.