Morningstar DBRS Upgrades BMPS' Long-Term Issuer Rating to BBB (low) from BB (high); Maintains Positive Trend

DBRS Ratings GmbH (Morningstar DBRS) upgraded Banca Monte dei Paschi di Siena SpA's (BMPS or the Bank) Long-Term Issuer Rating and Long-Term Senior Debt to BBB (low) from BB (high). As a result of this rating action, BMPS's Long-Term Issuer Rating and Long-Term Senior Debt Rating return to the investment grade level. At the same time, Morningstar DBRS upgraded the Bank's Short-Term Issuer Rating to R-2 (middle), upgraded the Bank's Subordinated Debt to BB from BB (low), and assigned a new credit rating of BB (high) to the Bank's Senior Non-Preferred Debt.

Morningstar DBRS also upgraded the Bank's Long Term Deposit credit ratings to BBB, 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. As part of this credit rating action, the Long-Term and Short-Term Critical Obligations Ratings were upgraded to BBB (high)/ R-1 (low). The trend on all long-term credit ratings remains Positive. The IA is now BBB (low), while the Support Assessment is SA3. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The credit rating upgrades, and the Positive trends considered BMPS' improved internal capital generation and its solid capital buffers, which provide the Bank with greater financial flexibility to withstand a potential deterioration in the economic environment and play an active role in the ongoing consolidation of the Italian banking system through potential acquisitions.

In January 2025, BMPS made a voluntary public exchange offer to buy 100% of the shares in Mediobanca S.p.A. (Mediobanca). BMPS has called an Extraordinary General Meeting on 17 April to approve the share capital increase reserved to the offer. In Morningstar DBRS' view, the acquisition of Mediobanca could be positive for BMPS' creditworthiness given the strengths of Mediobanca's franchise and its solid balance sheet. Nevertheless, the deal entails execution risks considering the hostile nature of the offer, which was rejected by Mediobanca's board of directors. Morningstar DBRS will continue to monitor this transaction and make a full assessment in case of completion. The deal, which requires regulatory approvals, is targeted for completion in Q3 2025.

Moreover, Morningstar DBRS' rating action considered the achievements of BMPS in complying with the commitments set by the European Commission as part of the state-backed precautionary recapitalisation in 2017. In Morningstar DBRS' view, this positions BMPS to compete on a more level playing field.

The Bank's IA at BBB (low) is currently positioned below the IA Range. This, in part, reflects the higher weighting in the scorecard calculation of the results for the period 2023-24, which incorporated some extraordinary positive items including the release of provision for legal risks, as well as the tax income for Deferred Tax Assets (DTAs) revaluation. The Bank's credit ratings have a Positive trend.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade the credit ratings if the Bank further demonstrated a sustained capacity to generate profits and additional improvements in asset quality. An upgrade would also result from the acquisition and successful integration of Mediobanca.

Given the Positive trend, a downgrade of the credit ratings is unlikely at this time. However, the trend would be changed to Stable should the Bank fail to maintain its improved profitability levels. A downgrade would occur in the case of a substantial deterioration in asset quality. Failure to maintain adequate liquidity buffers would also lead to a downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good/Moderate
BMPS is Italy's sixth-largest banking group by total assets and has significant market share in its home region of Tuscany. In 2024, the Bank continued to pursue its strategy of commercial revamping and network optimisation, initiatives that have led BMPS to regain market share. Moreover, in November 2024, the Italian Ministry of Economy and Finance (MEF) reduced further its stake in BMPS to 11.7% from 26.7% through an accelerated bookbuilding. As a result, BMPS is no longer subject to certain restrictions or bans across various areas including remuneration, acquisitions, total assets, and cost income. In addition, the European Central Bank (ECB) removed the requirement of preauthorisation for distributing dividends.

The potential combination with Mediobanca would create the third-largest banking group in Italy; in terms of franchise, this would result in the combination of BMPS' large retail and commercial banking network and Mediobanca's strong franchise in corporate and investment banking and consumer finance.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
Since 2023, the Bank's earning capacity has improved significantly. For YE2024, BMPS posted a net profit of EUR 1,951 million, down from EUR 2,052 million in 2023, but the latter had benefited from net releases of provisions for risks and charges. Excluding the net releases in 2023, as well as the income tax from DTA's revaluation in 2023 and 2024, the net income was up by 17% year over year (YOY) on the back of higher revenues, improved efficiency levels, and lower loan loss provisions (LLPs). In 2024, Morningstar DBRS noted the strong performance of fees and commissions, which grew by 10.8% YOY, driven by wealth management and advisory fees as well as commercial banking fees. This growth in part reflects the ongoing revamping of the Bank's commercial structure.

Morningstar DBRS expects the Bank's profitability to remain resilient despite the expected pressure on net interest income (NII) from the lower interest rate environment. Our view that takes into account the progress made with its risk profile as well as the Bank's recent reorganisation and improved business profile.

Risk Combined Building Block (BB) Assessment: Moderate
The Bank's risk profile has improved significantly in recent years following the large sale of nonperforming exposures (NPEs) and reduction of litigation risks on the back of some favourable court rulings. The stock of gross NPEs stood at EUR 3.7 billion for YE2024, slightly higher YOY. The gross and net NPE ratios were reported at 4.65% and 2.4%, respectively, which are still high compared with those of domestic and international peers. Nonetheless, Morningstar DBRS notes that roughly 27% of BMPS' NPE stock is covered by state guarantees.

In 2024, the Bank's asset quality showed some deterioration across SME clients, and to a lesser extend residential mortgages, which continued to feel the effect of higher interest rates. BMPS maintains significant credit exposure to SME clients. Nonetheless, the Bank has put in place several measures to mitigate credit risks, including reducing the stock of retail mortgage at variable rates, strengthening its early warning systems, reducing commercial real estate lending, and introducing more selective lending criteria for some emerging risk areas. In addition, the Bank sold a NPE portfolio in Q4 2024. Against this backdrop, Morningstar DBRS expects BMPS' gross NPE ratio to improve gradually to a level below 4%, in line with the Bank's business plan target for 2028. In Morningstar DBRS' view, the Bank has sufficient financial flexibility to accelerate its NPE reduction if needed.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
The Bank is largely funded by deposits from retail and corporate clients. The total deposits increased by 4% YOY to EUR 74 billion at YE2024, mainly due to the increase in time deposits, which helped to reduce the Bank's loan-to-deposit ratio. At the same time, the Bank lowered its exposure to central bank funding at around 7% of total liabilities from 11% at YE2023. The Bank's access to the debt market has improved as evidenced by the expansion of international investor base and compression of the credit spreads in recent bond issuances.

At YE2024, the Bank maintained a sound liquidity position with an unencumbered counterbalancing capacity of around EUR 33 billion, corresponding to circa 27% of the Bank's total assets. The LCR and net stable funding ratio were reported at 166% and 134%, respectively, at YE2024, significantly above regulatory requirements.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
In 2024, BMPS maintained solid capital buffers, reflecting its improved internal capital generation. The Bank reported a fully loaded CET1 ratio of 18.2% at YE2024, including the net profit for the period and net of dividend payment of EUR 1,083 million. The Bank's capital ratios are higher than those of its peer group and provide greater financial flexibility. Morningstar DBRS expects the Bank's capital ratios to remain solid even after its potential acquisition of Mediobanca.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/451458.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Governance (G) Factors
Morningstar DBRS does not longer consider the Business Ethics ESG subfactor as relevant to the credit ratings given the progress made with the legacy issues. Nonetheless, Morningstar DBRS continues to view the Corporate/Transaction Governance ESG subfactor as relevant to the credit ratings given BMPS's pending litigation risks. As of end-2024, the total extraordinary litigations and extrajudicial claims amounted to EUR 1.3 billion (including the Alken case), stable compared to the previous year.

There were no Environmental or Social 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 these credit ratings include Morningstar Inc. and company documents: BMPS' Q4 2024 Presentation, BMPS' Q4 2024 Press Release, and BMPS' 2024 Annual Report. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

This credit rating on the Senior Non-Preferred Debt concerns a newly issued financial instrument. This is the first Morningstar DBRS credit rating on this financial instrument.

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' trends 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/451459.

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

Lead Analyst: Nicola De Caro, Senior Vice President, Sector Lead - European Financial Institution Ratings
Rating Committee Chair: Marcos Alvarez, Managing Director - Global Financial Institution Ratings
Initial Rating Date: 18 January 2013
Last Rating Date: 15 April 2024

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

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