Morningstar DBRS Revises Trend on Cassa Centrale Banca to Positive, Confirms BBB (low) Long-Term Issuer Rating

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings of Cassa Centrale Banca – Credito Cooperativo Italiano S.p.A. (Cassa Centrale Banca or CCB or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). Concurrently, Morningstar DBRS confirmed the Bank’s Long-Term Deposit Rating at 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 credit ratings was changed to Positive from Stable. The Bank’s IA is maintained at BBB (low) and its Support Assessment at SA3. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

Cassa Centrale Banca – Credito Cooperativo Italiano S.p.A. is the central entity of Gruppo Bancario Cooperativo Cassa Centrale Banca Credito Cooperativo Italiano (Cassa Centrale Group or GBC or the Group).

The change in the trend to Positive from Stable takes into account the improvement in the Group’s risk profile driven by a reduction in the stock of legacy non-performing loans (NPLs) as well as a contained level of new NPL inflows, and a strengthening in the NPL coverage level. This, combined with ample capital buffers, places GBC in a better position to face the expected new asset quality risks stemming from the high level of interest rates and slowdown in economic activity.

In addition, the trend change reflects the improved core earnings power, mostly supported by higher net interest income and reduced credit costs. In Morningstar DBRS’s view, the recent boost in profitability is likely to be offset in the coming future by margin compression, subdued lending volumes, investments for digitalisation, and higher loan loss provisions (LLPs). Nonetheless, Morningstar DBRS expects GBC to be able to maintain some of the improved earnings thanks to overall higher average margins compared to the past, and initiatives to achieve further streamlining of its structure and operations.

In confirming the credit ratings, Morningstar DBRS considers the Bank’s primary role as the central institution of the second largest cooperative banking group in Italy, as well as its adequate funding, liquidity and capital position. In addition, our credit ratings take into account the Group’s moderate business diversification by geography and product, as well as the concentration risk arising from GBC’s sizeable exposure to Italian government bonds.

The Bank’s IA is positioned below the Intrinsic Assessment Range (IAR). This partly reflects the scorecard results which were recently boosted by non-recurring gains from the securities portfolio and loan loss reversals.

CREDIT RATING DRIVERS

An upgrade of the credit ratings would require GBC to maintain improved underlying profitability levels on a sustained basis without materially affecting its current asset quality and capitalisation.

Given the Positive trend, a downgrade of the credit ratings is unlikely at this time. However, the trend could be revised to Stable in the event of a material deterioration in asset quality and/or a sustained weakening of profitability.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Moderate

CCB is the central institution of the second largest Italian cooperative banking group, which aggregated 66 cooperative banks (BCCs), with combined assets of around EUR 91 billion at end-June 2023. GBC has a moderate footprint across Italy, concentrated in the North-East where the Group originated, and serving mostly households and SME clients. In Morningstar DBRS’s view, the cohesion agreement and the guarantee scheme are key to the functioning of the Group, and they have contributed to strengthen coordination and control within it, as well as to underpin its solvency and financial stability. Morningstar DBRS expects GBC to continue to take initiatives to simplify its structure as well as enhance integration and consolidation.

Earnings Combined Building Block (BB) Assessment: Moderate

GBC's underlying earnings power has improved in recent times, mainly driven by higher interest rates and lower credit costs. Nonetheless, Morningstar DBRS sees part of the recent boost in the Group's earnings as likely to be offset in the coming future due to margin compression, lower loan volumes, expenses for digital investments, and rising credit costs due to new asset quality risks. In H1 2023, GBC posted net attributable income of EUR 587 million, up 32% Year-On-Year (YOY). Total revenues were up 7% YOY in H1 2023, largely supported by higher net interest income (NII) and, to a lesser extent, higher net fees. The widening in commercial spreads resulting from a higher pass-through of rates to loans than to deposits, as well as the higher contribution to NII from the securities portfolio, has contributed to boost NII by 24% YOY in H1 2023. The cost-to-income ratio was around 61% in H1 2023 as calculated by Morningstar DBRS, slightly up from 60% in H1 2022, mainly due to higher headcount, inflationary pressures and IT investments. GBC posted loan loss reversals of around EUR 70 million in H1 2023 as opposed to LLPs of the same amount in H1 2022.

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

GBC’s risk profile has improved further over the last twelve months, supported by organic workout, NPL sales, and limited new NPL inflows. As a result, GBC’s asset quality metrics compare better than previously by international standards. GBC’s stock of gross NPLs was down 13% YOY at end-June 2023, corresponding to a gross NPL ratio of 4.8% (0.9% net of provisions), down from 5.4% (1.4%) one year earlier. The Group’s loan book is concentrated in households and SMEs, with limited exposure to large corporates, and approximately 11% of gross customer loans were backed by State guarantees at end-June 2023. Morningstar DBRS expects new NPL inflows to increase as market liquidity drains, interest rates remain high for longer, and economic activity continues to slowdown. Nonetheless, GBC plans to take actions to de-risk further its balance sheet and can also leverage its robust coverage levels on NPLs (82% at end-June 2023, up from 76% one year earlier) and on performing loans (1.2%, unchanged YOY).

The Group’s securities portfolio amounted to around EUR 37 billion at end-June 2023, or 41% of its total assets, and it was highly concentrated in Italian sovereign bonds classified at amortised cost (AC). The rapid increase in interest rates has contributed to generate significant unrealised losses on the debt securities classified at AC, however Morningstar DBRS considers the Group is able to manage this risk given its solid liquidity and capital position.

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

GBC’s funding profile is supported by the large, sticky and highly fragmented customer deposit base of the BCCs, and centralised access to the wholesale market via CCB. Deposits with households and SME clients are the Group’s main funding source, accounting for 74% of its total funding at end-June 2023. Deposits were down 5% in H1 2023 as clients have increasingly transferred part of their liquidity into assets under administration, mostly government bonds, to take advantage of higher yields. Nonetheless, deposits more than covered GBC’s loan book with a loan-to-deposit ratio of around 81% at end-June 2023, as calculated by Morningstar DBRS. At end-June 2023, GBC's exposure to the ECB was down 21% compared to end-2022 due to TLTRO III repayments, and it represented 15% of total funding. Outstanding bonds accounted for 6% of the Group's funding at end-June 2023, mostly consisting of securities privately placed with retail customers and certificates of deposit. However, since October 2022 CCB has completed two senior preferred bond issuances for combined EUR 700 million intended for institutional investors. GBC’s Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were strong at around 255% and 156% respectively at end-June 2023.

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

In Morningstar DBRS’s view, GBC's capital position is adequate, underpinned by a robust capital base and low capital usage in its business model. However, the improved, albeit still moderate, underlying internal capital generation as well as the lower than average flexibility to raise capital if required, constrain the Group's capital accretion ability. GBC posted fully loaded CET1 and Total Capital ratios both at around 23.7% at end-September 2023, up from 21.6% at end-2022 mainly thanks to retained earnings and, to a lesser extent, a reduction in Risk-Weighted Assets (RWAs). Capital buffers were solid, exceeding the regulatory minimum requirements by 1,500 bps and 1,000 bps respectively for CET1 ratio and Total Capital ratio. Supervisory requirements applicable for 2024 are unchanged compared to 2023, including a Pillar 2 Requirement (P2R) of 2.5%. The Group's resilience has been confirmed in the EBA 2023 Stress Test where GBC reported a minimum fully loaded CET1 ratio of 18.52% at the end of 2023 under the adverse scenario, marking a maximum depletion of around 303 bps compared to the starting value of the exercise.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/427325/.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427029/morningstar-dbrs-publishes-updated-methodology-for-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (23 January 2024).

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 Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427029/morningstar-dbrs-publishes-updated-methodology-for-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://dbrsmorningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar, Inc. and company documents, Cassa Centrale Banca H1 2023 Report, Cassa Centrale Banca H1 2023 Results Press Release, Cassa Centrale Banca Annual Reports 2019-2022, Cassa Centrale Banca H1 2023 Pillar 3 Report, and Cassa Centrale Banca 2022 Non-Financial Statement. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS 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. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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://dbrs.morningstar.com/research/427326/.

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

Lead Analyst: Andrea Costanzo, Vice President – European Financial Institutions Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director – Global Fundamental Ratings
Initial Rating Date: February 8, 2022
Last Rating Date: February 1, 2023

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