Press Release

Morningstar DBRS Upgrades Iccrea's Long-Term Issuer Rating to BBB, Stable Trend

Banking Organizations
October 21, 2024

DBRS Ratings GmbH (Morningstar DBRS) upgraded the ratings of Iccrea Banca SpA (Iccrea or the Bank), including the Long-Term Issuer Rating to BBB from BBB (low) and the Short-Term Issuer Rating to R-2 (high) from R-2 (middle). Concurrently, Morningstar DBRS upgraded the Bank's Long-Term Deposit Rating to BBB (high), 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 has been upgraded to BBB while its Support Assessment remains SA3. See a full list of ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The upgrade reflects Gruppo Bancario Cooperativo Iccrea's (GBCI or the Group) sustained improvement in core profitability, driven by the higher interest rate environment, good cost control, lower credit costs, and continued progress in the streamlining of its operational structure as well as further diversification of revenue sources. In addition, the upgrade considers that, despite the challenging environment, asset quality deterioration has not materialised, and GBCI continued to reduce its NPL stock all while reinforcing coverage levels, which stand at the higher end of its domestic and European group. In Morningstar DBRS' view, this should provide the Group with room to navigate potential headwinds that remain in an environment characterised by sluggish economic growth in Italy, geopolitical tensions and their collateral effects as well as the still high, albeit reducing, interest rate levels.

The credit ratings continue to reflect Iccrea's key role as the central entity of Gruppo Bancario Cooperativo Iccrea, the largest Italian cooperative banking group, its adequate funding and liquidity position and very high capital buffers, which mitigate the moderate flexibility to raise capital as well as a limited, although improving, internal capital generation.

CREDIT RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require a higher degree of diversification in the revenue streams, enabling the Group to maintain its improved profitability over the longer term. At the same time, it would also require the Group to maintain sound risk and capitalization profiles.

Given the recent upgrade, a downgrade of the credit ratings is unlikely at this time. However, it would occur in case of a material asset quality deterioration and a significant worsening of profitability metrics.

CREDIT RATING RATIONALE

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

Formed in March 2019, the Group is the largest cooperative network in Italy with 115 small cooperative banks (BCCs) and total combined assets of around EUR 166.2 billion at end-June 2024. The Group has an extensive domestic footprint with 2,415 branches and 22,416 employees evenly distributed across Italy, serving over 5 million clients, mostly households and SMEs. GBCI's domestic market shares are 6.3% and 6.4%, respectively, based on customer loans and customer deposits. Iccrea and the cooperative banks are managed by a cohesion agreement which creates a framework for more effective coordination and better controls within the Group as well as the potential for more consolidation and simplification of its complex structure. Morningstar DBRS expects the Group to continue to make efforts to further streamline its operational structure, enhance its distribution model, as well as invest in digitalisation and IT integration. As part of the recent reorganisation, the Group has signed partnership agreements with leading market players in payment systems, asset management and bancassurance businesses. The Group notably announced the creation of Numia, Italy's second largest e-payments business early October 2024, together with Banco BPM and private equity fund FSI.

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

The Group's underlying profitability has continued to improve, mainly driven by higher interest margins, cost control, and lower credit costs. In H1 2024, GBCI reported a net attributable income of EUR 1056.0 million, up 33% year over year (YOY) and a return on equity (ROE) of 14.3% in H1 2024, compared with 12.6% in H1 2023, and up from the average 7.4% reported in 2019-23. Total revenues were up 11% YOY in H1 2024, largely driven by a higher contribution to NII from the loan portfolio driven by higher interest rates while net fees were up 1% YOY in H1 2024, mostly related to payment and collection services. Operating costs remained under control, and the cost-to-income ratio improved further to 54.5% in H1 2024 from 59.6% in H1 2023, as calculated by Morningstar DBRS, driven by revenue growth. In H1 2024, LLPs were down 11% YOY, implying an annualised cost of risk of 38 basis points (bps), down from 43 bps in H1 2023.

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

In 2023 and H1 2024, GBCI continued to make progress in reducing its stock of legacy NPLs and is ahead of targets set in its de-risking strategy. This has been the result of proactive risk management as well as more benign asset quality trends in Italy despite higher interest rates and inflation levels. At end-June 2024, GBCI reported EUR 3.6 billion in gross NPLs, down 15% YOY, corresponding to a gross NPL ratio of 3.7%, or 1.0% net of provisions, a level we see as more in line with the average for Italian banks and the European average. The total NPL coverage ratio strengthened further to 72.8% as of end-June 2024 from 64.1% a year earlier, which sits at the higher end of the domestic peer group. The composition of gross NPLs has also improved with gross bad loans accounting for 29% at end-June 2024, down from 32% a year ago, with a coverage ratio of 87.7%. Morningstar DBRS expects GBCI to further reduce its stock of NPLs, which should help mitigate the expected future asset quality deterioration. The Group maintains a large exposure to securities, mainly Italian sovereign bonds. GBCI's total securities portfolio amounted to around EUR 59 billion as of end-June 2023, down from around EUR 65 billion a year ago, representing around 36% of its balance sheet. Around 87% of total securities were classified at amortised cost (AC), therefore reducing capital sensitivity to credit spread changes. Nevertheless, with the rapid increase in interest rates, the fixed income portfolio at AC has generated material unrealised losses which, however, are unlikely to materialise given GBCI's solid liquidity position.

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

In Morningstar DBRS' view, GBCI maintains a stable funding position, mainly supported by the large and granular retail deposit base of the BCC's. Access to the wholesale market is centralised via Iccrea Banca, and although recently created, GBCI has started to build up a track record of accessing capital markets with the issuances of senior as well as subordinated debt instruments falling within its EUR 5 billion EMTN program launched to fulfil its MREL minimum requirements. In February 2024, the Bank issued a EUR 500 million social senior preferred bond as well as covered bonds for a total of EUR 1.45 billion in H1 2024.

At end-H1 2024, the Group had around EUR 107.9 billion in customer deposits, which accounted for 73% of GBCI's total funding. These were up 1% year to date (YTD), mostly driven by an increase in term deposits, which enabled to Group to maintain a fairly stable loan-to-deposit ratio of 86% as calculated by Morningstar DBRS at end-June 2024. Households and SMEs remain the largest contributors to GBCI's deposit base, representing around 57% and 32% of the total, respectively. GBCI's deposits are generally granular, and mostly insured by the Interbank Deposit Protection Fund (Fondo Interbancario di Tutela dei Depositi or FITD). GBCI's exposure to the European Central Bank (ECB) further reduced by half YTD in H1 2024, reflecting TLTRO III repayments, which will continue to be repaid according to maturity by end-2024. Another factor supporting the credit ratings is the Group's liquidity position, with Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) at 263% and 161%, respectively, at end-June 2024.

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

In our view, GBCI maintains a solid capital position, thanks to high capital buffers and lower weight from unreserved NPLs after the significant restructuring achieved. However, we continue to view the Group's internal capital generation as moderate, although improving, while we consider its flexibility in raising capital limited due to its complex ownership structure. At end-June 2024, the Group reported a Common Equity Tier 1 (CET1) and Total Capital ratios 22.7% and 23.8%, respectively, up from 21.0% and 22.1% at end-2023, supported by retained earnings and the solid results in H1 2024 as well as reduced Risk-Weighted Assets (RWAs) more than offsetting dividends and share buybacks. As a result, GBCI maintains ample buffers of around 1,420 bps over the 2024 Overall Capital Requirement (OCR) for CET1 ratio, and 1,060 bps over the 2024 OCR for Total Capital ratio. As of end-June 2024, the Group's MREL ratio was 28.6% of GBCI's Risk-Weighted Assets (RWAs), and 10.5% of Leverage Ratio Exposure (LRE), respectively, above the intermediate targets of 20.695% and 6.35% applicable since January 1, 2022. The final MREL targets to be met by 1 January 2026 are 25.855% of Group's RWAs and 6.47% of LRE.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/441436.

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 (13 August 2024) https://dbrs.morningstar.com/research/437781.

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. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 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. Other sources include Iccrea H1 2024 Report, Iccrea H1 2024 Results Press Release, Iccrea 2020-2023 Annual Reports, Iccrea 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' 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/441435.

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

Lead Analyst: Arnaud Journois, Senior Vice President -- European Financial Institution Ratings
Rating Committee Chair: Marcos Alvarez, Managing Director -- Global Financial Institution Ratings
Initial Rating Date: 26 July 2018
Last Rating Date: 23 October 2023

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

Ratings

  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating