Morningstar DBRS Confirms Banca Nazionale del Lavoro's Long-Term Ratings at A (high), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on Banca Nazionale del Lavoro SpA (BNL or the Bank), the Italian banking subsidiary of BNP Paribas SA (BNPP, the Parent, or the Group). The credit ratings include an A (high) Long-Term Issuer Rating and an R-1 (middle) Short-Term Issuer Rating, both with a Stable trend. The credit rating action follows the confirmation of Morningstar DBRS' ratings on BNPP on June 20, 2024, and considers BNL's credit fundamentals and financial performance in 2023. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
Morningstar DBRS has maintained the SA1 support assessment on BNL, which implies strong and predictable support from the Parent. The credit ratings of BNL are positioned one notch below the ratings of BNPP, in line with Morningstar DBRS' credit rating approach for core banking subsidiaries located abroad in countries with low cross-border risk. On June 20, 2024, Morningstar DBRS confirmed BNPP's Long-Term Issuer Rating of AA (low) with a Stable trend. The SA1 takes into consideration the 100% ownership of BNL by BNPP, its strategic importance and integration in the Group.

CREDIT RATING DRIVERS
Given the SA1 designation, BNL's credit ratings will generally move in tandem with BNPP's credit ratings. An upgrade could follow an upgrade of the parent BNPP's credit ratings.

Similarly, a downgrade could result from a downgrade of BNPP's credit ratings or should the Bank become a noncore subsidiary for the Group or if BNPP materially decreases its level of support.

CREDIT RATING RATIONALE
BNL is BNPP's banking subsidiary in Italy, which BNPP considers to be a domestic market. At end-2023, BNL had EUR 103 billion in total assets. The Bank operates in retail and corporate banking with a nationwide franchise and a solid footprint across Central and Western regions of Italy. The Bank has been part of BNPP since its acquisition in 2006.

BNL is viewed as a core component of BNPP's retail franchise outside of France. In line with BNPP's strategy, Italy is considered a key market for the Group together with France, Belgium, and Luxembourg. BNL is integrated into the Parent company through shared systems, controls, management, and strategy, as well as treasury and risk management. Morningstar DBRS views that BNL's franchise, product offering, and reputation benefit from being part of a larger group. BNL has also consistently benefited from financial support from BNPP in various forms and Morningstar DBRS expects BNPP to continue to support BNL if needed.

The Bank's results, from a commercial view, improved further in 2023 with pre-tax income up 18.8% year-over-year (YOY), driven by higher revenues and lower provisions despite higher operating expenses. Net interest income increased by 6.6% YOY driven by better deposit margins, partly offset by a decline in loan volumes. Fees and commissions declined as financial fees weakened and banking fees remained resilient. Similar to its parent BNPP, BNL has continued implementing cost efficiency measures, from business simplification to digital transformation. Nonetheless, operating expenses grew by 4.4% YOY as a result of inflation. The reported cost/income ratio was 66%, which is almost unchanged YOY. The cost of risk decreased further to 53 basis points (bps) in 2023 down from 58 bps in 2022.

BNL's risk profile has continued to improve, driven by the still large but declining stock of nonperforming loans (NPLs). Total gross impaired loans amounted to EUR 2.5 billion at end-2023, down from EUR 3.5 billion at end-2022, thanks to a combination of NPL disposals and write-offs. As a result, the Bank's total gross NPL ratio decreased to 3.1% at end-2023, from 4.0% at end-2022, which is now more in line with domestic peers albeit still somewhat above international peers. Morningstar DBRS expects geopolitical tensions, still high interest rates and wage inflation to lead to a rise in defaults. However, BNL's earnings generation capacity and the backup of its Parent should provide some flexibility to absorb any potential deterioration in asset quality.

At end-2023, BNPP had provided EUR 19 billion in total funds to BNL, up more than 145% YOY compared with end-2022. As a result, BNPP funds correspond to 18% of the Bank's total liabilities and funds. Deposits from retail and corporate customers, however, remain the main source of funding, accounting for 70% of the total liabilities and funds. BNL also had EUR 1.8 billion of ECB funds, as a result of the Bank's participation in the TLTRO III programme, substantially reduced from EUR 15.7 billion a year ago.

The Parent also remains committed to maintain BNL's capital levels. The Bank reported a phased-in common equity tier 1 (CET1) ratio of 12.5% slightly up from end-2022, and a total capital ratio of 16.4%, up from 15.5% in 2022, which provides a good cushion above the ECB SREP requirements of 9.0% for CET1 and 13.25% for Total Capital.

ENVIRONMENTAL, SOCIAL, AND 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 euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881/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 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., company documents, and BNL 2023 Consolidated Accounts. 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' 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/434764/.

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

Lead Analyst: Sonja Forster, Vice President
Rating Committee Chair: Elisabeth Rudman, Managing Director
Initial Rating Date: December 11, 2017
Last Rating Date: June 21, 2023

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