DBRS Morningstar Confirms Banco BPM SpA’s Long-Term Issuer Rating at BBB, Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banco BPM SpA (BBPM or the Bank), including the Long-Term Issuer Rating of BBB and the Short-Term Issuer Rating of R-2 (high). The Bank’s Deposit ratings were confirmed at BBB (high)/R-1 (low), 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. Concurrently, the Mandatory Pay Subordinated Debt (ISIN XS1686880599) ratings have been discontinued as they have been repaid. The trend on the Group’s long-term and short-term ratings remains Stable. DBRS Morningstar has also maintained the IA of the Bank at BBB and the Support Assessment at SA3.

KEY CREDIT RATING CONSIDERATIONS

The confirmation of BBPM’s ratings and the Stable trend takes into account the Bank’s well established franchise in Italy with solid positions across the wealthy regions of Northern Italy, reinforced by the ongoing measures to streamline the operating structure and the development of digitalisation and fee-driven businesses, such as bancassurance. DBRS Morningstar’s notably views the latter as enabling the Bank to further diversify its business mix and reinforce value creation. DBRS Morningstar also notes the continued progress made by the Bank in improving its asset quality, furthering the significant de-risking undertaken by BBPM since its inception in 2017. In DBRS Morningstar’s view, this will help BBPM mitigate the expected negative implications for asset quality due to higher interest rates, high inflation, and weaker economic prospects. The ratings also continue to be underpinned by the solid funding and liquidity profile as well as the Group’s sound capital position, driven by recurrent capital generation and regular access to the wholesale markets.

The confirmation also reflects BBPM’s improved profitability, which has been primarily driven by higher interest rates boosting net interest income, contained cost of risk and a controlled cost base, reflecting BBPM’s commitment to expense reduction and the rationalisation of its franchise which mitigated the negative impact of inflation. Nevertheless, we also take into account that the Bank’s cost of risk remains above the European average, and we can expect a deterioration in future quarters stemming from the current environment, with inflation and higher interest rates impacting borrowers. Additionally, DBRS Morningstar expects NII to normalise in 2023, although BBPM revenues should also benefit going forward from higher fee and commissions thanks to the increased business diversification. Finally, we expect the windfall tax on Italian Banks to weigh on profitability.

CREDIT RATING DRIVERS

An upgrade of the ratings would require further demonstration of sustained core revenue improvement, whilst maintaining sound asset quality levels and a solid capital position.

The ratings would be downgraded should the Bank’s asset quality materially deteriorate. A sustained weakening of profitability metrics or capital levels could also lead to a downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good/Moderate
BBPM is the third largest Italian bank with EUR 198.5 billion in total assets at end-June 2023. The Group was formed from the merger of the former Banco Popolare and Banca Popolare di Milano on January 1, 2017. The BBPM franchise is underpinned by its solid market shares in Northern Italy, especially across the wealthy regions of Lombardy, Veneto and Piedmont. As part of its reorganisation and simplification process, BBPM has continued with the downsizing of its workforce and branch closures. In addition, we view as positive that BBPM has taken several steps to diversify its business mix, most notably reinforcing its strategic partnership in consumer finance, streamlining its footprint in leasing as well as placing a strong focus on the development of its bancassurance franchise and payment services business. We consider this should help the Bank further improve revenues going forward.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
In DBRS Morningstar’s view, profitability has gradually improved through a combination of cost savings initiatives, lower cost of risk and improving core revenues. The Bank’s NII has improved significantly as expected, given its high sensitivity to interest rate increases. On top of this, we expect commissions to further benefit from the growing contribution of insurance to the Group’s business. However, we see NII to be close to its peak considering our expectation of a slowdown in the tightening of the European Central Bank (ECB)'s monetary policy, as well as potential margin compression as banks attempt to retain market shares, lower new loan volumes, and the upcoming removal of the contribution from the mandatory reserve held at central bank following the recent policy change. The cost of risk should remain contained overall, as provisions in anticipation of further NPE reduction have already been booked and current default rates remain below expectations, despite the current environment. Finally, operating costs should further benefit from the ongoing reduction in staff numbers and the Bank’s commitment to cost containment, which should mitigate the impact of inflation and higher energy costs. BBPM reported net income of EUR 624.4 million in H1 2023, up 62.6% YOY from EUR 383.9 million in H1 2022 This was mainly driven by higher revenues stemming from a boost in net interest income, overall contained operating expenses and lower cost of risk. Total revenues increased by 13.4% YOY, as higher Net Interest Income (NII) up by 49.4% offset a lower financial result and subdued feed and commission income. Operating expenses remained overall under control YOY reflecting the Bank’s focus on cost savings. However, they increased slightly by 1.4% mainly due to inflationary pressure despite a slight decrease in personnel expenses. As a result, the cost-income ratio improved slightly to 49.5% in H1 2023 from 55.3% a year earlier. In H1 2023, the annualised cost of risk was 48 bps compared to 55 bps in H1 2022, in line with the target for 2024.

Risk Combined Building Block (BB) Assessment: Moderate
In recent years, the Bank has made significant progress in reducing its NPEs, mostly though disposals and securitisations, but also workouts. The Bank has put significant resources and effort into dealing with its NPEs, including the establishment of a dedicated NPE unit, as well as several capital management measures to strengthen provisioning levels and to cushion the impact from large NPE disposals. This has continued in H1 2023, with the Bank completing an additional EUR 200 million disposal in Q2 2023. With a gross NPE ratio at 3.8% in Q2 2023, the bank is well ahead of its target of 4.8% for 2024 of its strategic plan. This continued de-risking means that BBPM’s asset quality is now more in line with other Italian banks and provides a much better starting point for any potential deterioration the Bank might face in the current challenging environment. The total stock of NPEs decreased to EUR 4.2 billion at end-June 2023 from EUR 4.8 billion at end-2022 and the Gross NPE ratio decreased to 3.8% from 4.2% at end-2022, broadly in line with the average for domestic peers. Coverage for bad loans was 61.9% (64.8% at end-2022) and coverage of Unlikely-to-Pay (UTP) loans was 42.1% (40.3% at end-2022). On top of this, BBPM also reported a high share of secured loans which accounted for 66% of total gross NPEs at end-June 2023.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views Banco BPM’s funding profile as solid, supported by a large and stable deposit base which accounted for approximately 83% of the Bank’s funding at end-June 2023. In addition, DBRS Morningstar positively views that the Bank has diversified its funding sources and reinforced its total loss absorption capacity through issuances on the wholesale markets. The Bank maintains a solid liquidity position, with total high quality liquid assets (HQLA) at around EUR 33.4 billion, of which EUR 17.7 billion from TLTRO III after a further reimbursement of EUR 9 billion in June 2023. In addition, the Bank reported LCR and NSFR ratios comfortably above requirements at end-June 2023.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views BBPM’s capital position as solid, benefitting from the Bank’s capacity to generate earnings. In addition, the Bank’s capital ratios were further reinforced through issuances which helped diversify the capital base and build-up the total loss absorption capacity. Furthermore, thanks to the active de-risking process the Bank has undergone, BBPM’s capital is less pressured by the NPE stock, although we could expect some deterioration in coming quarters as a result of the current environment. The Bank has also requested to apply the Danish compromise to take into account the insurance activities, which should further increase the capital ratios by 60 bps. The Bank maintains ample capital cushions over its SREP requirements of around 550 bps for common equity tier 1 (CET1) and and 615 bps for Total Capital. The CET1 ratio was 14.2% at end-June 2023 compared to 12.8% at end-2022 and 14.7% at end-2021. The total capital ratio stood at 19.5% at end-June 2023, up from 18.0% at end-2022.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/421799.

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 (4 July 2023) – https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

Notes:

All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) – https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. 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 credit rating include Morningstar Inc. and Company Documents, BBPM H1 2023 and 2022 Presentations, BBPM H1 2023 and 2022 Press Releases, BBPM H1 2023 Interim Report, BBPM 2022 Annual Report and BBPM 2022 Sustainability Report. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the credit 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 credit 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 credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/421801.

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

Lead Analyst: Arnaud Journois, Vice President, Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices
Initial Rating Date: January 5, 2017
Last Rating Date: October 14, 2022

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