DBRS Morningstar Assigns First-Time Public Ratings to BFF Bank; LT Issuer Rating at BB (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) assigned first-time public ratings to BFF Bank S.p.A. (BFF or the Bank), including a Long-Term Issuer Rating of BB (high) and a Short-Term Issuer Rating of R-3. The Bank’s Long-Term Deposits Rating is BBB (low), one notch above the Intrinsic Assessment (IA) to reflect 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) and its Support Assessment is SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The BB (high) IA reflects the Bank’s small size as well as its leading position in the niche sector of management and non-recourse factoring of trade receivables due from the public administration (PA) and National Healthcare System (NHS), and its improved business diversification by product and geography achieved via acquisitions. The ratings also consider BFF’s adequate capitalisation and asset quality profiles which mainly benefit from its asset concentration in the public sector. BFF’s factoring and lending business proved to be strongly profitable and resilient, primarily driven by higher interest margins, a leaner cost structure and lower credit costs compared to domestic banks. While DBRS Morningstar expects BFF’s profitability to remain above domestic banks in the foreseeable future and to benefit from improved revenue diversification, the ratings also take into account that recent net profit levels included one-off gains which, however, were not paid out as dividends.

The ratings also incorporate BFF’s high, albeit reduced, reliance on wholesale funding sources and its sound liquidity position. At the same time, the ratings consider the concentration risk arising from BFF's sizeable exposure to Italian sovereign bonds.

The Stable trend reflects that the Bank’s risks are broadly balanced at BB (high) rating level. In addition, the Stable trend takes into account DBRS Morningstar’s view that BFF should navigate the current challenging operating environment affected by higher interest rates, high inflation and sluggish economic growth given its business focus on public administrations which typically entail less risk than the private sector during adverse economic cycles.

RATING DRIVERS

An upgrade would require a significant reduction in concentration risk related to the Italian sovereign bond portfolio and/or a lower reliance on wholesale funding sources while maintaining sound profitability, asset quality and capitalisation.

A downgrade would likely be driven by a material deterioration in the Bank’s asset quality. Any sign of significant worsening in the funding and liquidity profile would also contribute to a downgrade.

RATING RATIONALE

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

With approximately EUR 12 billion of total assets at end-March 2023, BFF is a small Italian bank specialised in the management and non-recourse factoring of trade receivables due from the PA and NHS. While holding a market share below 2% in the overall Italian factoring industry, BFF is a leader in niche factoring with PA and NHS. The Bank has grown its factoring and lending business across Europe over the years organically and inorganically via acquisitions of Magellan in Poland, and IOS Finance in Spain. As a result, BFF currently operates in 9 European countries, although Italy remains the main market. In addition, in 2021 BFF entered the securities services, and banking & corporate payment businesses in Italy through the acquisition of DEPObank - Banca depositaria italiana S.p.A. (DEPObank). Since 2017, BFF has been listed on the Italian stock exchange and as of end-March 2023, 94% of BFF’s shares were floating on the market.

Earnings Combined Building Block (BB) Assessment: Good

BFF's earnings power has been strong in recent years, driven by higher interest margins, a leaner cost structure and lower credit costs compared to domestic banks. The Bank’s revenue mix has become more diversified, however DBRS Morningstar recognises that recent net profit levels included one-off gains, such as the badwill from the acquisition of DEPObank and some changes in the accounting of its revenues. Net income was up 55% Year-On-Year (YOY) in Q1 2023 (up 38% YOY excluding one-off items), implying an annualised return on equity (ROE) of 24%, in line with the average 26% in 2010-2022. Total revenues were up 22% YOY in Q1 2023, and mainly consist of net interest income (NII) originated by the purchase of discounted invoices as well as the late payment interests (LPIs) on overdue invoices. Based on the way BFF accounts for LPIs and recovery cost rights, at end-March 2023 the Bank had EUR 548 million of off-balance profit reserves not recognised in its P&L. NII was up 25% YOY in Q1 2023 and we expect it to grow further in 2023 driven by higher rates and the lag in repricing of assets compared to liabilities. Net fees, mostly attributable to the securities services and payment businesses, were 16% of total revenues in Q1 2023. Other income was up 66% YOY in Q1 2023 mainly due to a capital gain from the sale of Italian government bonds. BFF’s cost-to-income ratio was 40% in Q1 2023, down from 47% in Q1 2022, and has generally proved to be better than the national average. The Bank’s annualised cost of risk was just 5 bps in Q1 2023, in line with the average 8 bps in 2018-2022, which testifies to the modest credit risk embedded in its business model due to its operations mostly being transacted with the PA.

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

DBRS Morningstar considers BFF's risk profile as adequate given its business focus on public administrations which typically entail less risk than the private sector. The Bank's customer loan book reached a Q1 historical high of around EUR 5 billion at end-March 2023, up 30% YOY, and 65% concentrated in Italy. BFF’s gross non-performing exposure (NPE) ratio was 6.6% at end-March 2023 (or 6.1% net of provisions), up from 3.2% at end-2021 due to a more severe accounting of the new Definition of Default (DoD). NPEs mostly consist of past-due arising from PA late payments, and exposures to municipalities in conservatorship which are classified as bad loans by regulation despite BFF's legal entitlement to receive 100% of the principal and LPIs at the end of the recovery process. Total NPE coverage ratio was around 7.4% at end-March 2023 and has generally been low in recent years, due to BFF's historically high NPE recovery rate. However, DBRS Morningstar notes that gross Stage 2 loans (loans where credit risk has increased since origination), were around 20% of BFF's total gross loans at end-2022, up from around 6% at end-2018.

BFF maintains a large exposure to Italian sovereign bonds which were around EUR 5.6 billion at end-March 2023, or 48% of its total assets and 12 times its Common Equity Tier 1 (CET1) Capital. The exposure is fully reclassified as held to collect (HTC), however the increase in interest rates led to the formation of unrealised losses of around EUR 115 million at end-March 2023, or 426 bps of capital.

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

In DBRS Morningstar’s view, BFF’s funding profile has improved since the acquisition of DEPObank, however its reliance on wholesale sources remains significant and exposes the Bank to market trends and funding concentration risk. Total deposits, including customer and bank deposits, were 65% of total funding at end-March 2023, of which 78% came from transaction services and the remaining 22% were digital deposits. Total deposits were down 23% from end-2021 to end-March 2023, mainly due to the loss of Arca and Anima clients, only partly offset by higher digital deposits. BFF regularly makes use of short-term repurchase agreements backed by sovereign bonds with stable counterparties, representing 34% of total funding at end-March 2023. In line with BFF’s funding cost optimisation strategy after the acquisition of DEPObank, debt securities issued were just EUR 39 million at end-March 2023, entirely consisting of senior preferred bonds, which matured in May 2023. As of end-March 2023, BFF's Liquidity Coverage Ratio (LCR) was 195.3%, and its Net Stable Funding Ratio (NSFR) was 152.6%.

Capitalisation Combined Building Block (BB) Assessment: Moderate

DBRS Morningstar sees BFF's capital position as adequate, underpinned by its strong profitability and low capital absorbing business model given its asset concentration in the public sector. However, the Bank’s dividend policy limits its ability to grow capital organically. At end-March 2023, BFF reported a CET1 ratio of 17% and a Total Capital ratio (TCR) of 22.6% (both net of around EUR 53 million of accrued dividends), up from 16.9% and 22.3% at end-2022. The Bank's capitalisation has improved in recent years mainly driven by a regulatory reduction in the risk weight applied to NHS and other PA from 2020, the incorporation of DEPObank's capital light businesses, retained earnings, and EUR 150 million Additional Tier 1 (AT1) issuance in 2022 which more than offset EUR 100 million Tier 2 bond early repayment and the implementation of the new DoD. As a result, at end-March 2023 BFF held solid buffers of 800 bps and 1,010 bps respectively over its SREP minimum requirements for CET1 and Total Capital ratios. As BFF’s dividend policy provided for the full distribution of adjusted earnings in excess of 15% internal target for TCR, the Bank paid around EUR 615 million in dividends since its Initial Public Offering (IPO) in 2017, or around 77% of its IPO market cap. As part of its 2028 strategic plan, BFF’s revised dividend policy is based on an internal target of 12% for CET1, in addition to 15% TCR as long as requested by the ECB.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/417366.

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, BFF 2028 Strategy Update Press Release, BFF 2028 Strategy Update Presentation, BFF Q1 2023 Results Press Release, BFF Q1 2023 Results Presentation, BFF 2010-2022 Annual Reports, BFF 2022 Pillar 3 Report, BFF 2022 Country by Country Reporting, and BFF 2022 Non-Financial Statement. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS Morningstar rating on this issuer.

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/417367.

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 19, 2023
Last Rating Date: Not applicable as there is no last rating date.

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