Morningstar DBRS Confirms Istituto per il Credito Sportivo e Culturale S.p.A.'s Issuer Ratings at BBB/R-2 (high), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings of Istituto per il Credito Sportivo e Culturale S.p.A. (ICSC or the Bank), including its Long-Term Issuer Rating at BBB and its Short-Term Issuer Rating at R-2 (high). At the same time, Morningstar DBRS confirmed the Bank's Long-Term Deposits at BBB (high), one notch above the Long-Term Issuer Rating, 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 is Stable. The Bank's Support Assessment is SA1. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
ICSC's credit ratings reflect a Support Assessment of SA1, which implies the expectation of predictable support from its main shareholder, the Italian government. Morningstar DBRS currently rates the Republic of Italy's (Italy) Long-Term Foreign and Local Currency - Issuer Ratings at BBB (high) with a Stable trend (for more details on the rationale for the sovereign credit rating action, please refer to the press release "Morningstar DBRS Confirms Republic of Italy at BBB (high), Stable Trend" at https://dbrs.morningstar.com/research/431647.

ICSC's Long-Term Issuer Rating is one notch below Italy's Long-Term Foreign and Local Currency - Issuer Ratings, reflecting that, despite the expectation of predictable support, there is not a government guarantee or explicit commitment from the government to maintain the Bank's capitalisation. Nevertheless, Morningstar DBRS expects support to ICSC from the Italian state to be forthcoming in case of need, as a result of the Bank's ownership and its strategic public mission. The Stable trend mirrors the trend on Italy's credit ratings.

The credit rating action also takes into consideration the Bank's recent transformation into a joint stock company. At this stage, Morningstar DBRS does not anticipate any material change in the Bank's ownership, scope, and mission.

CREDIT RATING DRIVERS
An upgrade of the Republic of Italy's credit ratings would likely lead to an upgrade of ICSC's credit ratings. An upgrade of ICSC's Long-Term Issuer Rating could also be driven by an explicit guarantee and commitment of support to ICSC from the Italian government.

A downgrade of ICSC's credit ratings could result from a downgrade of Italy's sovereign credit rating. In addition, any indication of a weakening of the commitment from the Italian government and/or a change of control in the Bank's ownership structure could also lead to a downgrade.

CREDIT RATING RATIONALE
ICSC is a small public bank with total assets of around EUR 3.6 billion at end-2023, responsible for ensuring sustainable support to sport and culture in Italy. ICSC is a leader in the niche sector of financing Italian sporting facilities. Morningstar DBRS expects support to ICSC from the Italian state to be forthcoming in case of need, as a result of the Bank's ownership and its strategic public mission, which Morningstar DBRS deems to be the key pillars underpinning ICSC's credit ratings. Since 2014, ICSC has been ultimately 89.4% owned by the Italian state, with 80.4% direct ownership through the Italian Ministry of Economy and Finance (MEF) and around 9% indirect ownership. This ownership structure is the result of material corporate governance issues that forced ICSC under extraordinary administration for more than six years until February 2018. As the main reference shareholder, the Italian state is represented on the board of directors, with members appointed by the government, other public shareholders, or the MEF. Since 1 July 2024, ICSC has transformed into a joint stock company and has changed its denomination from the previous Istituto per il Credito Sportivo. At this stage, Morningstar DBRS does not anticipate any material change in the Bank's ownership resulting from the transformation. At the same time, Morningstar DBRS' understanding is that ICSC will continue to pursue its public interest mission.

In Morningstar DBRS' view, the Bank's earnings power remains modest, primarily reflecting limited revenue diversification, low interest margins, weaker operating efficiency, and above-average cost of risk. ICSC's revenue mix also shows some dependence on volatile profit sources, mainly related to its Italian sovereign bond portfolio. ICSC reported a net profit of around EUR 10 million in 2023, down 46% Year-On-Year (YOY), and its total revenues were down 24% YOY in 2023; however, 2022 included a sizeable non-recurring trading gain. However, even core revenues (net interest income (NII) and net fees), almost entirely consisting of NII, were down 8% YOY, as the Bank's liabilities have repriced faster in a higher interest rate environment than its assets, which are mostly fixed-rate with long-term duration. The Bank's operating efficiency has deteriorated recently, reaching a cost-to-income ratio of around 68% in 2023 from an average level of 46% from 2019 to 2022, mainly due to higher headcount, inflationary pressures, investments to support ongoing projects, and lower revenues. ICSC's cost of risk was 8 basis points (bps) in 2023, down from 51 bps in 2022; however, potential new risks to asset quality might arise due to still high interest rates and sluggish economic activity.

Morningstar DBRS sees ICSC's risk profile as still relatively weak although improved due to loan workouts, improved lending standards, and disposals. Sports-related loans still represent the lion's share of ICSC's loan book; however, the contribution from culture-related loans has increased over the last years, reaching 8% of the total at end-2023. The Bank's gross and net non-performing exposure (NPE) ratios were 9.6% and 4.3%, respectively, at end-2023, unchanged YOY, and still comparing unfavourably with the Italian average. NPEs mainly arise from ICSC's exposure to the private sector; however, this accounts for a lower proportion of the Bank's loan book than exposure to the public sector. In addition, Morningstar DBRS notes that most of ICSC's loan portfolio benefits from public and bank guarantees. However, single-name concentration in ICSC's loan book does remain relatively high, albeit reduced, in Morningstar DBRS' view. Gross Stage 2 loans (loans where credit risk has increased since origination) increased to 23% of ICSC's gross loans at end-2023 from 19% one year earlier. While high-for-longer interest rates and weaker economic prospects could add risk to asset quality in the near future, in Morningstar DBRS' view this risk is mitigated by ICSC's customers mostly benefitting from loans at preferential rates, as well as its good loan workout ability, the better-quality and more diversified new loan volumes, and co-financing opportunities connected with the European Recovery and Resilience Facility (RRF) funds.

ICSC maintains a large exposure to Italian sovereign bonds, which were down 6% YOY at end-2023, equivalent to around 25% of its total assets and 100% of Common Equity Tier 1 (CET1) capital. Of the total portfolio, 21% is classified at held to collect (HTC) and, because of the increase in interest rates, the fair value of HTC debt securities (including sovereign and non-sovereign) was lower than the carrying value by around EUR 18 million at end-2023, or 143 bps in terms of capital, lower than 307 bps one year earlier.

Morningstar DBRS views ICSC's funding and liquidity profile as sound, benefitting from the significant, albeit reduced, recourse to its shareholder funds and access to multilateral institutions, which have ensured growing and low-cost funding. In addition, in October 2022, ICSC tapped the capital markets for the first time by issuing a social senior preferred bond of EUR 300 million. The Bank's exposure to the European Central Bank was down 27% YOY in 2023 due to TLTRO (targeted longer-term refinancing operations) III repayments, and it has progressively decreased over the years in favour of bank repo transactions to improve funding diversification, optimise funding costs, and better manage the securities portfolio. ICSC's partnership with Raisin initiated in 2022 has enabled the Bank to collect retail time deposits in Germany, which accounted for 1.4% of its total funding at end-2023. ICSC's Liquidity Coverage Ratio was 987% at end-2023 whereas its Net Stable Funding Ratio was 125%.

ICSC maintains a robust capital position, in light of its high capital base and moderate capital-absorbing business model, driven by the concentration of its assets to public clients, which receive low risk weights, as well as the use of public guarantees. However, the Bank's internal capital generation remains modest. ICSC's regulatory own funds consist of CET1 capital only, with the CET1, Tier 1, and Total Capital ratios all standing at 70% at end-2023, down from 71.4% at end-2022, mainly due to higher capital-absorbing lending solutions. The current level of capital ratios provides sizeable cushions over the Bank's 2023 minimum requirements of 9.65% for the CET1 ratio and 14.25% for the Total Capital ratio.

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://dbrs.morningstar.com/issuers/17689.

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 https://dbrs.morningstar.com/research/427030 (23 January 2024).

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations, https://dbrs.morningstar.com/research/433881 (4 June 2024). 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 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 this credit rating include Morningstar, Inc. and company documents, ICSC 2019-2023 Annual Reports, ICSC 2023 Pillar 3 Report, ICSC PR dated 3 July 2024, ICSC Bylaws (July 2024), and ICSC 2023 Sustainability Report. 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' 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/435814/.

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

Lead Analyst: Andrea Costanzo, Vice President - European Financial Institution Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director - Global Financial Institution Ratings
Initial Rating Date: August 2, 2021
Last Rating Date: July 10, 2023

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