Morningstar DBRS Revises Trend on Banco BPM to Positive, Confirms BBB Long-Term Issuer Rating

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit 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 trend on the Long-Term Issuer Rating is now Positive. 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. The trend on the Deposit ratings is Stable, as they are at the same level as the ratings of the Republic of Italy. Morningstar DBRS has also maintained the Intrinsic Assessment (IA) at BBB and the Support Assessment at SA3. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The change of the trend to Positive reflects BBPM’s sustained improvements in profitability, through a combination of cost control, low cost of risk and a strong increase in revenues against the backdrop of higher interest rates which have boosted net interest income (NII) throughout 2023. Whilst Morningstar DBRS expects NII to normalise in 2024 as lower interest rates are expected, revenues should still be sustained, as Morningstar DBRS also expects BBPM to benefit from higher fee and commissions thanks to increased business diversification. On top of this, Morningstar DBRS considers the Bank has managed to consistently improve its operating efficiency through branch and staff reductions as well as franchise optimisation, which should continue to support profits. In Morningstar DBRS’s view, this provides the Bank with flexibility to absorb a potential deterioration in the cost of risk which could materialise in the current environment, with inflation and higher interest rates potentially impacting borrowers.

The Positive trend also considers BBPM’s ongoing commitment to asset quality improvement. Whilst the progress made in reducing legacy NPLs in recent years has already been significant, the bank is planning additional NPE sales of around EUR 700 million by 2026, for which they have frontloaded the cost in Q4 2023. This should provide room to absorb potential asset quality deterioration whilst keeping NPE ratios in line with European peers.

The confirmation of the credit ratings reflects 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. In Morningstar DBRS’s opinion, bancassurance will provide the bank with further cost synergies as well as additional revenue streams to support profits. The credit ratings continue to be underpinned by the Bank’s solid funding and liquidity profile as well as the Bank’s sound capital position, driven by recurrent capital generation and regular access to the wholesale markets.

CREDIT RATING DRIVERS

An upgrade of the Long-Term Issuer rating would require further demonstration of improved profitability, a continued commitment to improve asset quality and a solid capital position.

The credit 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
Banco BPM is the third largest Italian bank with EUR 202.1 billion in total assets and 1,358 domestic commercial branches at end-2023. The Group was formed from the merger of former Banco Popolare and former Banca Popolare di Milano on January 1, 2017. The Banco BPM franchise is underpinned by 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 further downsized its workforce and continued to close branches. In addition, Morningstar DBRS views as positive that BBPM has taken several steps to diversify its business mix, in consumer finance and leasing, as well as placing a strong focus on the development of bancassurance and payment services business, which have started to bear fruits and should improve revenues going forward.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
In Morningstar DBRS’s view, profitability has gradually improved through a combination of cost saving initiatives, lower cost of risk and improving core revenues. As anticipated by Morningstar DBRS, the Bank’s NII has improved significantly, given its high sensitivity to interest rate increases. However, Morningstar DBRS sees 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 ECB’s zero remuneration rates on mandatory reserves. Morningstar DBRS expects commissions to further benefit from the growing contribution of insurance to the Group’s business. The cost of risk should increase as current levels are at a historical low. However, Morningstar DBRS expects it should remain contained overall, as provisions in anticipation of further NPE reductions by 2026 have been booked in Q4 2023 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. BBPM reported net income of EUR 1.3 billion in 2023, up from EUR 685.0 million in 2022. This was mainly driven by a boost in net interest income. Total revenues increased by 14.3% YOY, mainly driven by Net Interest Income (NII), up by 42.1% boosted by high interest rates and low deposit costs resulting in an increase in the commercial margin which compensated for the loss of revenues from TLTRO III financing. This offset subdued net fees and commissions, mainly driven by lower management, brokerage and advisory fees due to the placement of funds and SICAVs and a loss in the net financial result, mainly impacted by high funding costs. Operating expenses remained overall under control YOY reflecting the Bank’s focus on cost savings. However they increased slightly by 1.6% mainly due to inflationary pressure. Nevertheless, this was offset by core revenues, leading to an improvement in the cost-income ratio to 48.1% in 2023 from 54.1%. Loan loss provisions (LLP) were down 18.1% in 2023 YOY to EUR 558.6 million, absorbing 20% of Income before Provisions and Taxes (IBPT). In 2023, the cost of risk was 53 bps compared to 62 bps in 2022.

Risk Combined Building Block (BB) Assessment: Good/Moderate
In recent years, the Bank has made significant progress in reducing its NPEs, mostly though disposals and securitisations, but also organic workouts. This has continued in 2023, with the Bank completing an additional EUR 200 million disposal in 2023, demonstrating the Bank’s ongoing commitment to de-risking. On top of this, the Bank is planning additional NPE disposals of EUR 700 million by 2026, for which they have frontloaded the cost in Q4 2023. With a gross NPE ratio at 3.5% at end-2023, the Bank is on track to reach an NPE ratio of around 3.0% targeted by 2026. In our view, BBPM’s asset quality now provides a solid starting point for any potential deterioration the Bank might face in the current challenging environment, characterised by tighter financial conditions and weaker economic dynamics.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
Morningstar DBRS views Banco BPM’s funding profile as solid, supported by a large and stable deposit base which accounted for approximately 79% of the Bank’s funding at end-2023. In addition, the Bank remains active in tapping the wholesale markets. Another factor supporting the credit ratings is the Bank's solid liquidity position. At end-2023, BBPM’s total high quality liquid assets (HQLA) were around EUR 34.1 billion, of which EUR 15.7 billion from TLTRO III after a significant reimbursement of EUR 11 billion in 2023. Also confirming a solid liquidity position, the Bank reported LCR and NSFR ratios well above the regulatory requirements at 187% and 129% in 2023.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
The Bank’s capital ratios continue to compare well with European peers and remain well above the minimum Supervisory Review and Evaluation Process (SREP) requirements for 2024, which stood at 9.07% for the CET1 ratio and 13.56% for the total capital ratio. The CET1 ratio was 14.2% at end- 2023 up from 12.8% at end-2022 despite risk-weighted asset (RWA) growth. Similarly, the total capital ratio stood at 19.0% at end- 2023, up from 18.0% at end-2022. These provide BBPM with ample cushions above minimum capital requirements, with cushions above requirements of around 515 bps for CET1 and 545 bps for Total Capital. The Bank also reported a solid CRR/CRD IV leverage ratio of 5.2% at end-2023. Morningstar DBRS also notes the Bank had a buffer of 888 bps over its 2023 MREL regulatory requirement and of 691 bps over its 2024 requirement.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/431356.

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 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 (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-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 Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-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, BBPM Q4 2023 Presentation, BBPM Q4 2023 Press Release and BBPM 2023 Annual Report. Morningstar DBRS considers the information available to it for the purposes of providing this 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’ outlooks and 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 rating assumptions can be found at: https://www.dbrsmorningstar.com/research/431355.

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

Lead Analyst: Arnaud Journois, Vice President, Credit Ratings - European Financial Institution Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director - Global Financial Institution Ratings
Initial Rating Date: January 5, 2017
Last Rating Date: October 12, 2023

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