Morningstar DBRS Changes the Trend on Intesa Sanpaolo SpA to Positive From Stable Following Sovereign Rating Action

DBRS Ratings GmbH (Morningstar DBRS) changed the trend on the Long-Term and Short-Term Issuer ratings of Intesa Sanpaolo SpA (ISP or the Bank) to Positive from Stable. Concurrently, the Bank's Long-Term and Short-Term Issuer Ratings were confirmed at BBB (high)/R-1 (low). The Intrinsic Assessment (IA) of the Bank is maintained at BBB (high) 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 change of trend to Positive from Stable takes into account Morningstar DBRS' recent credit rating action on the Republic of Italy (Italy), and is underpinned by ISP's leading retail and commercial banking franchise in Italy, supported by its diversified business model and solid earnings profile, as well as the Bank's sound asset quality and solid capitalization, which have further improved in Q2 and Q3 2024.

On 25 October 2024, Morningstar DBRS confirmed Italy's Long-Term Foreign and Local Currency - Issuer Ratings at BBB (high) and changed the trends on those ratings to Positive from Stable. (For more details on the rationale for the sovereign credit rating action, please refer to the press release "Morningstar DBRS Changes Trends on Republic of Italy to Positive, Confirms Ratings at BBB (high)" https://dbrs.morningstar.com/research/441770/).

ISP's Long-Term Senior Debt rating and its Deposit ratings are both positioned in line with the sovereign credit rating of Italy, therefore the trends on these ratings have also been changed to Positive from Stable following the sovereign rating action.

The Bank's IA remains positioned below the Intrinsic Assessment Range, largely driven by the level of the sovereign rating. Morningstar DBRS continues to recognise the strengths of ISP's business model, its leading market positions and solid capital levels, however ISP's credit ratings are also 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.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require the Bank to maintain its current fundamentals, including robust profitability, sound asset quality and solid capital position, as well as requiring an upgrade of Italy's sovereign credit rating.

Given the recent change in trend, a downgrade of the Long-Term Issuer Rating is unlikely. However, it 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
In Q3 2024, the Bank reported net income of EUR 2.4 billion, up 26.4% year over year (YOY). Results were supported by higher operating income and lower loan loss provisions, which offset a moderate growth in operating expenses. ISP recorded a 3% YOY increase in net interest income, still benefitting from the higher, although declining, interest rates and relatively low deposit costs. Revenues were also supported by a 9.9% YOY increase in net fee and commission income, driven by management, dealing, and consultancy activities, with notable performances in portfolio management and insurance. Operating expenses were up 2.4% YOY, mainly affected by higher staff costs and intensive technology investments. However, Morningstar DBRS expects the Bank to report lower operating expenses in the years to come, given its announced intention to reduce full-time employees by 9,000 by 2027 in anticipation of artificial intelligence tools. ISP reported a cost-income ratio of 40.2% in Q3 2024, improved from 41.8% in Q3 2023 and still very well placed within its European peer group. Loan loss provisions (LLPs) were down 32.8% YOY to EUR 238 million in Q3 2024, including EUR 16 million in relation to Russia/Ukraine exposures. Morningstar DBRS also notes that LLPs were down 25.6% on a quarterly basis. The Bank reported an annualised cost of risk of 25 basis points (bps) with overlays totalling EUR 0.9 billion for the first nine months of 2024, reflecting a significant de-risking and stability throughout the year.

At end-Q3 2024, ISP reported a low gross nonperforming loan (NPL) ratio of 2.2%, down from 2.4% at end-Q3 2023, and a net NPL ratio of 1.1%, in line from the ratio reported a year ago. Morningstar DBRS views these ratios as being in line with European averages. The total cash coverage of NPLs stood at 50.8% at end-Q3 2024, in line with the Italian banking sector. The Bank reported a fully loaded CET1 capital ratio of 13.9%, up from 13.2% (pro-forma, taking into account the share-buyback) at end-2023 thanks to organic capital generation, and 13.6% at end-Q3 2024 when taking into account a 70% cash payout ratio. This allowed ISP to maintain ample buffers of around 450 bps over SREP requirements for CET1. The Bank also reported a 19.6% total capital ratio at end-Q3 2024.

Franchise Combined Building Block Assessment: Strong/Good

Earnings Combined Building Block Assessment: Strong/Good

Risk Combined Building Block Assessment: Good

Funding and Liquidity Combined Building Block Assessment: Good

Capitalisation Combined Building Block Assessment: Good/Moderate

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/442517.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on 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 Italy are discussed separately at https://www.dbrsmorningstar.com/issuers/17689.

ESG Considerations had a significant effect on the credit analysis.
The Social and Governance factors affect ISP as the ESG factors for Italy are passed through to ISP given that the Bank's credit ratings or trend would likely move along with the credit ratings or trend of the Sovereign (see credit rating drivers).

There were no Environmental factors that had a relevant or significant 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) at 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 Risk Factors in Credit Ratings (13 August, 2024) https://dbrs.morningstar.com/research/437781 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.

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 Q3 2024 Results Press Release, Intesa Sanpaolo Q3 2024 Results Presentation and Intesa Sanpaolo Q3 2024 Report. 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/442518.

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: Vitaline Yeterian, Senior Vice President - European Financial Institution Ratings
Initial Rating Date: 19 September 2013
Last Rating Date: 23 May 2024

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