Morningstar DBRS Upgrades Cassa Centrale Banca - Credito Cooperativo Italiano S.p.A.'s Long-Term Issuer Rating to BBB, Changes Trend to Stable

DBRS Ratings GmbH (Morningstar DBRS) upgraded the credit ratings of Cassa Centrale Banca - Credito Cooperativo Italiano S.p.A. (Cassa Centrale Banca or CCB or the Bank), including the Long-Term Issuer Rating to BBB from BBB (low). Concurrently, Morningstar DBRS upgraded the Bank's Long-Term Deposits to BBB (high), which is one notch above the Intrinsic Assessment (IA), reflecting the legal framework in place in Italy that has full depositor preference in bank insolvency and resolution proceedings. Morningstar DBRS also changed the trends on all credit ratings to Stable from Positive. Morningstar DBRS upgraded the Bank's IA to BBB from BBB (low) while its Support Assessment remains SA3. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
Cassa Centrale Banca - Credito Cooperativo Italiano S.p.A. is the central entity of Gruppo Bancario Cooperativo Cassa Centrale Banca Credito Cooperativo Italiano (Cassa Centrale Group or GBC or the Group).

The credit rating upgrades and the Stable trends reflect the improvement in the Group's profitability, primarily driven by higher net interest income (NII) and reduced loan loss provisions (LLPs). In addition, GBC's asset quality metrics have stabilised at improved levels as de-risking efforts coupled with robust loan coverage levels have offset the impact from the new inflows to nonperforming loans (NPLs) and some contraction in the loan book because of higher interest rates. Morningstar DBRS' view is that the Group should be able to maintain a higher earnings power than in the years prior to the tightening in monetary policy despite the ongoing interest rate cuts, higher investments for digitalisation, and potentially higher LLPs because of new asset quality risks. This view takes into account Morningstar DBRS' expectation that interest-rate margins will likely remain higher than in the last decade as well as the Group's ongoing initiatives to diversify its revenue streams and improve cost efficiency. At the same time, GBC's solid loan coverage ratios and capital buffers, both standing significantly above the sector's average, provide further comfort to any downside risk the Group might face in the coming future.

The credit ratings continue to incorporate the Bank's primary role as the central institution of the second-largest cooperative banking group in Italy, as well as its adequate funding and liquidity position, and its ample and further strengthened capital buffers over the minimum requirements. In addition, the credit ratings take into account the Group's moderate business diversification by geography and product, as well as the concentration risk arising from GBC's sizeable exposure to Italian government bonds.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require GBC to improve its revenue diversification as to ensure sustainability to its improved core profitability metrics, while maintaining adequate risk profile and sound capital buffers. An improvement in operating efficiency would also contribute to an upgrade.

A downgrade of the credit ratings would occur in the event of a material deterioration in GBC's asset quality and/or if its profitability reverted to substantially weaker levels.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Moderate
CCB is the central institution of the second largest Italian cooperative banking group, which aggregated 65 cooperative banks (BCCs), with combined assets of around EUR 88 billion at end-June 2024. GBC has a moderate footprint with around 1,500 branches and 12,200 employees distributed across Italy, concentrated in the North-East where the Group originated, and serving 2.5 million customers, mostly households and small and medium enterprise (SME) clients. In Morningstar DBRS' view, the cohesion agreement and the guarantee scheme are key to the functioning of the Group, and have contributed to strengthen coordination and control within it as well as to underpin its solvency and financial stability.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
GBC's core earnings power has improved recently, mainly driven by higher NII and lower credit costs. Nonetheless, in Morningstar DBRS' view, some of the Group's improved profitability will likely be offset by interest margin compression as well as higher operating expenses because of structurally higher personnel costs and higher digital investments, and possibly by higher LLPs should new risks to asset quality materialise in the current still-high-interest-rate environment. GBC posted a net attributable income of EUR 577 million in the first half of 2024 (H1 2024), down 2% year-over-year (YOY), and the annualised return on equity (ROE) was 13.3% in H1 2024, up from the average ROE of 6% reported in 2019¿23. Total revenues were up 4% YOY in H1 2024, mainly supported by higher NII stemming from higher rates associated with loans and securities, and to a lesser extent, higher net fees. The cost-to-income ratio remained flat YOY at around 61% in H1 2024 as calculated by Morningstar DBRS. GBC posted loan loss reversals of around EUR 34 million in H1 2024, lower than around EUR 70 million loan loss reversals reported in H1 2023; however, loan coverage levels remain robust.

Risk Combined Building Block (BB) Assessment: Good/Moderate
GBC's risk profile has stabilised at improved levels as organic workout actions, NPL sales, and strong coverage levels have offset the impact from limited new NPL inflows and loan contraction. As of end-June 2024, GBC's stock of gross NPLs was down 1% compared with end-2023, corresponding to a gross NPL ratio of 4.3%, flat compared with end-2023. However, net of provisions, the NPL ratio was 0.8% at end-June 2024, slightly up from 0.7% at end-2023 because of lower coverage and lower loans. The Group's loan book is concentrated in households and SMEs, with limited exposure to large corporates. GBC's total NPL coverage was around 82% as of end-June 2024 while coverage on performing loans was 1.4%, both standing at significantly higher levels than the sector's average. Morningstar DBRS' view is that new NPL inflows might increase in the current still-high-interest-rate environment; however, GBC should be able to maintain adequate asset quality metrics on the back of further de-risking, strong coverage levels, and some support to credit expansion if rates continue to decline as expected.

The Group's securities portfolio amounted to around EUR 34 billion at end-June 2024, down 3% compared with end-2023 and accounting for 39% of its total assets. The portfolio is mainly concentrated in Italian sovereign bonds classified at amortised cost (AC). The fair value of debt securities classified at AC was lower than their carrying value because of the increase in interest rates; however, Morningstar DBRS does not expect these unrealised losses to materialise given the Group's solid liquidity position.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
GBC's funding profile is supported by the large, sticky and highly fragmented customer deposit base of the BCCs, and centralised access to the wholesale market via CCB. Deposits with households and SMEs are the Group's main funding source, accounting for 81% of its total funding at end-June 2024. Deposits were up 3% in H1 2024 despite the competition exerted by the higher yields carried by Italian government bonds. GBC's loan-to-deposit ratio was 76% at end-June 2024 as calculated by Morningstar DBRS. At end-June 2024, GBC's exposure to the European Central Bank was down 47% compared with end-2023 because of TLTRO III repayments, and it represented 7% of total funding. Outstanding bonds accounted for 9% of the Group's funding at end-June 2024, mostly consisting of securities privately placed with retail customers and certificates of deposit. However, since October 2022 CCB has completed two senior preferred bond issuances for combined EUR 700 million intended for institutional investors. GBC's liquidity coverage ratio and net stable funding ratio were strong at around 298% and 178%, respectively, at end-June 2024.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
Morningstar DBRS views GBC's capital position as adequate, underpinned by its robust capital base and moderate capital usage in its business model; however, the moderate underlying internal capital generation as well as the lower-than-average flexibility to raise capital if required, might constrain the Group's capital accretion ability. GBC posted fully loaded CET1 and Total Capital ratios both at around 25.9% at end-June 2024, up from 24.2% at end-2023 mainly thanks to retained earnings and, to a lesser extent, a reduction in risk-weighted assets. Capital buffers were solid, exceeding the regulatory minimum requirements by 1,750 basis points (bps) and 1,290 bps, respectively, for CET1 ratio and Total Capital ratio. Supervisory requirements for 2024 include a Pillar 2 Requirement of 2.5%, unchanged YOY.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/443515.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 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 this credit rating include Morningstar, Inc. and company documents, Cassa Centrale Banca H1 2024 Report, Cassa Centrale Banca H1 2024 Results Press Release, Cassa Centrale Banca Annual Reports 2020-2023, Cassa Centrale Banca Strategic Plan 2024-2027 Presentation, Cassa Centrale Banca H1 2024 Pillar 3 Report, and Cassa Centrale Banca 2023 Non-Financial Statement. 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/443514.

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: Marcos Alvarez, Managing Director - Global Financial Institution Ratings
Initial Rating Date: 8 February 2022
Last Rating Date: 31 January 2024

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