Morningstar DBRS Confirms BP Alto Adige’s LT Issuer Rating at BBB (low); Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings of Banca Popolare dell’Alto Adige – Volksbank SpA (BPAA 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 ratings is Stable. The Bank’s IA is maintained at BBB (low) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings reflects BPAA’s relatively small but solid and stable franchise in its home region of Trentino-Alto Adige, stable funding and liquidity position, supported by a resilient and granular deposit base, as well as its adequate capital ratios. BPPA’s credit ratings also takes into account that profitability has improved, driven by net interest income growth on the back of higher interest rates, although it remains modest partly due to a relatively low revenue diversification. In addition, the credit ratings reflect BPAA’s further reduction of Non-Performing Exposures (NPEs), although asset quality remains weak compared to domestic and international peers.

However, the credit ratings, take into account that Morningstar DBRS considers the Bank’s fragmented shareholder base and modest internal capital generation as constraints to its ability to improve its capital position. In addition, credit ratings reflect that Morningstar DBRS expects the current environment to lead to a rise in defaults.

CREDIT RATING DRIVERS
An upgrade of the credit ratings would require a significant reduction of NPEs, together with a sustained improvement in the Bank’s profitability metrics.

A downgrade of the credit ratings would occur from a significant deterioration in the Bank’s risk profile or capitalisation.

CREDIT RATING RATIONALE

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

With approximately EUR 12 billion of total assets at end-2023, BPAA maintains a stable market position in the wealthy autonomous region of Trentino-Alto Adige / Südtirol. Located in the north-eastern part of Italy, the region of Trentino-Alto Adige has historically economically outperformed the rest of Italy, benefiting from its strategic location at the border with Austria and Switzerland, and its special status which provides greater autonomy.

Earnings Combined Building Block (BB) Assessment: Moderate

BPAA's earnings generally reflects the Bank’s low revenue diversification and solid efficiency levels. In 2023, profitability has improved, as higher net interest income on the back of higher interest rates and a provision release offset an increase in operating expenses. As a result, the Bank reported a net profit of around EUR 101 million in 2023, up 34% YOY, and a Return on Equity (ROE) of 11.3%, up from 8.9% in 2022. The Bank's cost-to-income ratio improved to around 55% in 2023, from 59% in 2022, as the bank benefited from positive operating jaws. 2023 results were also supported by a loan loss provision release of EUR 1.5 million compared to EUR 24 million of loan loss provisions (LLPs) last year, which was previously booked to anticipate an asset quality deterioration that has only partly materialised to date.

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

In recent years, the Bank has made progress in reducing its NPEs stock, mostly through disposals and securitisations, but also organic workouts. At end-2023, the stock of gross NPEs was down 13% YOY from end-2022 to EUR 335 million and the gross Non-Performing loans (NPL) ratio improved to 4.4% at end-2023, from 5.0% at end-2022. The net NPL ratio was 1.9% at end-2023, down from 2.3% at end-2022 and the Total NPL coverage improved to 59.0% at end-2023, up from 56.3% one year earlier. Despite the improvement, however, Morningstar DBRS considers the Bank’s asset quality metrics remain weaker than domestic and international standards. At end-2023, bad loans (or sofferenze) represented 50.8% of total gross NPLs, up from 45.7% at end-2022. At end-2023, the Bank reported its coverage for bad loans at 74.4% (70.7% in 2022), unlikely-to-pay loans at 44.1% (44.8% in 2022), and past-due loans at 27.6% (29.9% in 2022), in line with the domestic market.

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

Morningstar DBRS views BPAA’s funding profile as adequate, underpinned by its stable and granular retail deposit franchise in its home market. At end-2023, customer deposits were up 4.4% YOY to EUR 8.7 billion, accounting for around 82% of its direct funding from customers. The proportion of central bank funding decreased to around 7% from 21% at end-2022, following the repayment of most of the bank’s exposure to TLTRO III, down to EUR 767 million at end-2023. A key strength supporting the credit ratings is the Bank’s solid liquidity position. At end-2023, BPAA had enough unencumbered securities to amply cover the outstanding net short-term funding. Also, the Bank reported at end-2023, LCR and NSFR ratios well above the regulatory requirements.

Capitalisation Combined Building Block (BB) Assessment: Moderate

The Bank’s capital ratios were reinforced 2023 through improved internal capital generation. The Bank’s phased-in CET1 ratio and Total Capital ratio (TCR) were 15.4% and 16.8% respectively at end-2023, up from 14.9% and 16.7% at end-2022, despite some risk-weighted asset (RWA) growth from loan growth. These ratios compared to a minimum 2024 Overall Capital Requirement (OCR) for CET1 ratio of 8.8% and total capital of 13.0% according to the Supervisory Review and Evaluation Process (SREP). The Bank also reported a sound fully loaded CRR/CRD IV leverage ratio of 6.8% at end-2023.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/432741.

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 (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 Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (15 April 2024) https://dbrs.morningstar.com/research/431155/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://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and company documents, Banca Popolare dell’Alto Adige 2019-2023 Annual Reports, and Banca Popolare dell’Alto Adige 2023 Non-Financial Statement. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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://www.dbrsmorningstar.com/research/432740.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President – European Financial Institutions Ratings
Rating Committee Chair: Maria Rivas, Senior Vice President, Sector Lead - European Financial Institution Ratings
Initial Rating Date: February 18, 2014
Last Rating Date: May 16, 2023

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