Morningstar DBRS Confirms Intesa Sanpaolo’s Issuer Ratings at BBB (high)/R-1 (low); Stable

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings of Intesa Sanpaolo SpA (ISP or the Bank), including the Long-Term Issuer Rating of BBB (high) and the Short-Term Issuer Rating of R-1 (low). The trend on all credit ratings is Stable. The Intrinsic Assessment (IA) of the Bank is maintained at BBB (high) 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 confirmation of ISP’s credit ratings and the Stable trend takes into account the Bank’s leading retail and commercial banking franchise in Italy, supported by its diversified business model and solid earnings profile. Furthermore, Morningstar DBRS considers the Bank’s robust funding profile, its solid capital position and profitability, resulting from a combination of sound operating efficiency, contained cost of risk and a strong increase in revenues against the backdrop of higher interest rates which have boosted net interest income (NII) 2023 and Q1 2024. Whilst Morningstar DBRS expects NII to normalise going forward as lower interest rates are expected, revenues should still be sustained, as Morningstar DBRS also expects Intesa Sanpaolo to continue benefiting from fees and commissions on the back of its high degree of business diversification. 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 credit ratings also incorporate the significant improvement ISP has achieved with its risk profile in recent years, despite the Bank’s exposure to Russia, which has declined to a level in Q1 2024 from which a potential direct further impact would be negligible. Asset quality metrics are now in line with European peers, which in Morningstar DBRS’s view should provide room to absorb potential asset quality deterioration.

ISP’s Long-Term Senior Debt rating and Deposit ratings are both positioned in line with the sovereign credit rating of Italy. In addition, the Bank’s IA is positioned below the Intrinsic Assessment Range (IAR). While we continue to recognise the strengths of ISP’s business model, its leading market positions and solid capital levels, ISP’s credit ratings are highly correlated with any changes made to the sovereign credit rating, given its high exposure to Italian sovereign bonds and concentration in the domestic banking market. The Stable trend is also in line with the trend on Morningstar DBRS’s sovereign credit rating on the Republic of Italy (BBB (high) / R-1 low / Stable).

CREDIT RATING DRIVERS

An upgrade of the credit ratings would likely be driven by an upgrade of Italy’s sovereign credit rating, assuming the Bank maintains its current fundamentals, including robust profitability, sound asset quality and solid capital position.

A downgrade of the credit ratings would result from a downgrade of Italy’s sovereign credit rating or a material deterioration in the Bank’s risk profile and capital position.

CREDIT RATING RATIONALE

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

With EUR 932 billion of total assets as of end-March 2024, ISP is the largest Italian banking group providing universal banking products to corporate and retail clients mainly in Italy, and to lesser extent, in Central and Eastern Europe (CEE) and the Middle East. The Bank maintains a solid competitive position in Italy underpinned by its large domestic franchise, well diversified business model, and strong reputation. Revenue diversification towards fee-driven activities including asset management, private banking and insurance, as well as strong cost discipline have been key contributors to the Bank’s resilient pre-provision income. Under the new 2022-2025 business plan, the Bank remains focused on further de-risking, cost control and digitalisation, as well as greater income diversification from commissions driven by wealth management, protection and advisory, and stronger commitment on sustainability and ESG on which the bank is delivering.

Earnings Combined Building Block (BB) Assessment: Good

In Q1 2024, the Bank reported net income of EUR 2.3 billion, up 17.6% YOY, marking its best quarter since 2007. Results were supported by a 20.8% YOY increase in net interest income (NII) on the back of higher spreads amid the current interest rate environment and low deposit costs, despite TLTRO III repayment. Revenues were also supported by a 6.3% YOY increase in net fee and commission income, driven by wealth management, protection and advisory and strong insurance performance. The Bank kept its cost base under control despite inflationary pressures and intensive technology investments thanks to a 3.3% YOY reduction in administrative costs, resulting in a slight increase of operating expenses of 1.3% YOY. As a result, ISP’s cost-income ratio improved to 38.2% in Q1 2024 from 41.9´% in Q1 2023, very well placed within the European peer group. Loans Loss Provisions (LLPs) were up 24.9% YOY to EUR 236 million in Q1 2024, including recoveries of EUR 5 million in relation to Russia/Ukraine exposures. However, LLPs were down 61.7% on a quarterly basis, largely reflecting a significant reduction in Russia-linked exposure. The Bank reported an annualised cost of risk (CoR) of 22 bps with overlays totalling EUR 0.9 billion in Q1 2024, reflecting a significant de-risking.

Risk Combined Building Block (BB) Assessment: Good

In Morningstar DBRS’s view, Intesa has sound asset quality supported by a gradual reduction in NPLs, adequate provisions, and prudent underwriting. Since the NPL peak in 2015, the total stock of gross NPLs has gradually decreased to reach EUR 10.1 billion as of end-March 2024. The reduction in NPLs was mainly driven by large disposals, as well as by recoveries and lower NPL inflows in line with the improving performance of the Italian economy. In our view, Intesa Sanpaolo’s current asset quality 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.

At end-March 2024, Intesa Sanpaolo reported a low gross NPL ratio of 2.3%, down from 2.4% one year earlier and a net NPL ratio of 1.2%, in line from the ratio reported a year ago. We view these levels as in line with European averages. The total cash coverage of NPLs stood at 50.7% at end-March 2024, in line with the Italian banking sector. ISP has actively reduced its exposure to Russia, from around EUR 8.9 billion in Q1 2022 (2.7% of the Group’s RWAs) to EUR 3.9 billion in Q1 2024 (1.3% of the Group’s RWAs).

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

Morningstar DBRS views ISP’s funding profile as solid, benefiting from a robust and diversified retail deposit base. As of end-March 2024, current accounts and deposits, both retail and wholesale, accounted for 68% of total direct deposits from banking business, while retail funding overall accounted for 77%. In addition, 84% household deposits are considered secured, guaranteed by the Deposit Guarantee Scheme.

Another factor supporting the credit ratings is the Bank's solid liquidity position, with MREL ratios exceeding requirements. At end-March 2024, ISP’s total high quality liquid assets (HQLA) were around EUR 160 billion, of which EUR 9 billion were from TLTRO III after a significant reimbursement of EUR 51 billion in 2023 and EUR 36 billion in Q1 2024. Also confirming a solid liquidity position, the Bank reported LCR and NSFR ratios well above the regulatory requirements of 169% and 121% at end-March 2024. ISP’s access to the international funding market has remained stronger than Italian peers reflecting its strong market position, even during periods of stress. Wholesale issuances continued in 2023 and in Q1 2024 with a EUR 2.25 billion green senior non-preferred bond, a GBP 600 million green senior non-preferred and two floating rate senior preferred totalling EUR 3.25 billion. Also, Morningstar DBRS notes that the recent issuance of a EUR 1 billion perpetual Additional Tier 1 (AT1) bond, with a 7.00% coupon, demonstrating investor appetite for the bank’s issuances on the wholesale markets.

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

In our view, Intesa Sanpaolo maintains a solid capital position thanks to its good capital generation capacity and despite a traditionally large shareholder remuneration. The Bank reported a pro-forma CET1 capital ratio of 13.3%, when taking into account the share buyback of EUR 1.7 billion to be launched in early June 2024 (impact of around 40 bps from 13.7% at end-2023). Excluding this, capital improved thanks to organic capital generation despite the distribution of EUR 1.6 billion in accrued dividends, the payment of the AT1 coupon and higher risk-weighted assets (RWAs) due to market risk adjustments. At end-March 2024, ISP reported a total capital ratio of 18.9%. Overall, the Bank maintained ample buffers despite increased SREP requirements of 9.3% for CET1 and 13.5% for Total Capital.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/433158.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Credit rating actions on the Republic of Italy are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of Italy are discussed separately at https://www.dbrsmorningstar.com/issuers/17689.

The Social and Governance factors impact Intesa Sanpaolo as the ESG factors for the Republic of Italy are passed-through to ISP given that the Bank's credit ratings or trend would move along with the credit ratings or trend of the Sovereign (see credit rating drivers).

There were no Environmental 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 (23 January 2024) 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 following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (15 April 2024)
https://dbrs.morningstar.com/research/431186/morningstar-dbrs-global-corporate-criteria

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. Other sources include Intesa Sanpaolo Q1 2024 Results Press Release, Intesa Sanpaolo Q1 2024 Results Presentation, Intesa Sanpaolo Q1 2024 Report, Intesa Sanpaolo Annual Reports 2019-2023, Intesa Sanpaolo 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/433160.

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

Lead Analyst: Arnaud Journois, Vice President - European Financial Institution Ratings
Rating Committee Chair: William Schwartz, Senior Vice President - Global Fundamental Ratings, Credit Practices
Initial Rating Date: September 19, 2013
Last Rating Date: May 25, 2023

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