DBRS Morningstar Upgrades Iccrea’s Long-Term Issuer Rating to BBB (low), Stable Trend

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

KEY CREDIT RATING CONSIDERATIONS

The upgrade reflects the Gruppo Bancario Cooperativo Iccrea (GBCI or the Group)’s continued progress in improving its asset quality profile by reducing its stock of non-performing loans (NPLs) while keeping robust coverage levels and solid capital buffers. In our view, the Group is in a stronger position to face the risks stemming from the ongoing economic slowdown, high inflation and higher interest rates. The upgrade also takes into account the improvement in core profitability achieved through higher interest margins, a lower burden from loan provisioning given the stronger risk profile, and a number of initiatives aimed at boosting fee income and efficiency. Moreover, we expect GBCI to benefit from some extraordinary profits mostly attributable to the ongoing reorganisation of its payment, bancassurance and asset management businesses.

The Bank’s ratings continue to reflect Iccrea’s key role as the central entity of Gruppo Bancario Cooperativo Iccrea, the largest Italian cooperative banking group, its adequate funding and liquidity position as well as the progress in streamlining its structure to make the Group more cohesive and integrated.

The Bank’s IA is positioned below the Intrinsic Assessment Range (IAR). This partially reflects the scorecard results which, in DBRS Morningstar’s view, were recently inflated by non-recurring gains from the securities portfolio and from the reorganisation of the Group’s payment operations.

CREDIT RATING DRIVERS

An upgrade would require further improvements in terms of asset quality, efficiency and revenue diversification on a sustained basis while maintaining sound capital buffers.

A downgrade of the ratings would occur in the event of a significant deterioration in asset quality and profitability metrics.

CREDIT RATING RATIONALE

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

Formed in March 2019, the Group is the largest cooperative network in Italy with 117 small cooperative banks (BCCs) and total combined assets of around EUR 168 billion at end-June 2023. The Group has an extensive domestic footprint with around 2,400 branches and 22,000 employees evenly distributed across Italy, serving over 5 million clients, mostly households and SMEs. GBCI's domestic market shares are 6.1% and 6.3% respectively based on customer loans and customer deposits. Iccrea and the cooperative banks are managed 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. DBRS Morningstar expects the Group to continue make efforts to further streamline its operational structure, enhance its distribution model, as well as invest in digitalisation and IT integration. As part of the recent reorganisation, the Group has signed partnerships agreements with leading market players in payment systems, asset management and bancassurance businesses.

Earnings Combined Building Block (BB) Assessment: Moderate

GBCI’s underlying profitability has improved mainly driven by higher interest margins, cost control and lower credit costs. In H1 2023, GBCI reported a net attributable income of EUR 795 million, up 18% Year-On-Year (YOY), and an annualised Return on Equity (ROE) of 12.6%, in line with 12.4% in H1 2022, but up from the average ROE of 6% reported in 2019-2022. Total revenues were up 9% YOY in H1 2023, driven by higher net interest income (NII) and net fees, despite higher funding costs, lower contributions to NII from the inflation-linked Italian government bonds and TLTRO III sources, and heightened volatility in the financial markets. The cost-to-income ratio was 59.6% in H1 2023, down from 62.6% in H1 2022, as calculated by DBRS Morningstar, reflecting growth in revenues. GBCI’s annualised cost of risk was 43 bps in H1 2023, in line with 40 bps in H1 2022, but down from around 90 bps in H1 2021.

Risk Combined Building Block (BB) Assessment: Moderate

The Group has continued to make progress in reducing its stock of legacy NPLs, and is ahead of targets set in its de-risking strategy. This has been the result of proactive risk management as well as more benign asset quality trends in Italy despite higher interest rates and high inflation. The Group’s credit quality metrics are now more in line with domestic peers and compare more favourably to international standards.

As of end-June 2023, GBCI reported EUR 4.2 billion in gross NPLs, down 25% YOY, corresponding to a gross NPL ratio of 4.5% (or 1.4% net of provisions), or 4% (1.4%) pro-forma for the recent agreement to sell around EUR 570 million of bad loans (or sofferenze) and unlikely-to-pay (UtP) loans. At the same time, the total NPL coverage ratio further strengthened to 69.3% from 64.1% in the same period, which is one of the higher levels amongst domestic peers. In addition, DBRS Morningstar notes that a high share of GBCI’s NPLs are backed by real estate collateral (65% of total, as of end-June 2023). GBCI targets a further reduction in the stock of NPLs, and this should help mitigate the expected future asset quality deterioration.

GBCI’s risk profile also reflects a significant concentration in Italian sovereign bonds which are largely classified at amortised cost. The total portfolio of financial assets, including Italian government bonds, amounted to around EUR 65 billion as of end-June 2023, of which 85% were classified at amortised cost (AC), therefore reducing capital sensitivity to credit spread changes. Nevertheless, with the rapid increase in interest rates, the fixed income portfolio at AC has generated material unrealised losses, which however are unlikely to materialise given the Group’s solid liquidity position. Going forward, GBCI expects a reduction in the size of its securities portfolio associated with a higher level of diversification.

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

GBCI maintains a stable funding position, mainly supported by the large and granular retail deposit base of the BCC’s network. Access to the wholesale market is centralised via Iccrea Banca and has become more frequent via issuances of senior as well as subordinated debt instruments. In January 2023, the Bank issued a EUR 500 million social senior preferred bond, followed by the issuance of covered bonds for EUR 500 million in July 2023. At end-H1 2023, the Group had around EUR 104 billion in customer deposits (or 70% of GBCI's total funding), down 4% YOY, and a loan-to-deposit ratio of around 86%, as calculated by DBRS Morningstar. Households and SMEs remain the largest contributors to GBCI's deposit base, representing around 60% and 29% of the total, respectively. Deposits are generally granular, and mostly insured by the Interbank Deposit Protection Fund ("Fondo Interbancario di Tutela dei Depositi" or FITD). While remaining the Group’s second main source of funding at 14% of total at end-June 2023, GBCI’s exposure to the ECB has reduced further and will continue to decline according to maturity by end-2024. GBCI’s Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were solid at 257% and 148% respectively at end-June 2023.

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

GBCI’s capitalisation benefits from increased capital buffers and a lower burden from unreserved NPLs given the de-risking achieved as well as the more robust NPL coverage and capital base. However, albeit improved, the Group's internal capital generation remains moderate, and its flexibility in raising capital, if required, is limited due to its complex ownership structure. At end-June 2023, GBCI’s fully loaded Common Equity Tier 1 (CET1) and Total Capital ratios were 19.8% and 21% respectively, up from 18.5% and 19.7% at end-2022, supported by retained earnings as well as a positive impact in the valuation reserve and reduced risk-weighted assets (RWAs). This translates into capital buffers of around 1,120 bps for CET1 ratio and 770 bps for Total Capital ratio over regulatory minima for 2023 which incorporate a Pillar 2 Requirement (P2R) of 2.8%, down from the previous 2.83%. Under the EBA 2023 Stress Test, GBCI reported a fully loaded CET1 ratio of 20.89% and 14% at end-2025 respectively in the baseline and adverse scenario.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/422288.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental Social/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 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 credit rating include Morningstar Inc. and Company Documents, Iccrea H1 2023 Report, Iccrea H1 2023 Results Press Release, Iccrea 2019-2022 Annual Reports, Iccrea 2022 Non-Financial Statement. 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/422290.

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

Lead Analyst: Nicola De Caro, Senior Vice President – European Financial Institutions
Rating Committee Chair: William Schwartz, Senior Vice President – Credit Practices
Initial Rating Date: July 26, 2018
Last Rating Date: November 28, 2022

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