Morningstar DBRS Upgrades Banco BPM SpA's Long-Term Issuer Rating to BBB (high) From BBB, Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) upgraded the credit ratings on Banco BPM SpA (BBPM or the Bank), including the Long-Term Issuer Rating to BBB (high) from BBB and the Short-Term Issuer Rating to R-1 (low) from R-2 (high). The trend is Stable. Morningstar DBRS confirmed the Bank's Long-Term Deposits and Short-Term Deposits credit ratings at BBB (high)/R-1 (low), respectively, as they are at the same level as the Republic of Italy. Morningstar DBRS also increased the Intrinsic Assessment (IA) to BBB (high) and confirmed the Support Assessment at SA3. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The upgrade of the credit ratings takes into consideration BBPM's sustained improvements in profitability, through a combination of cost control, low cost of risk, and a greater level of business diversification. BBPM has taken several steps to diversify its business mix, in consumer finance and leasing, as well as placing a strong focus on the development of bancassurance and payment services. Moreover, the recent acquisition of Anima Holding (Anima) will strengthen the Bank's position in the asset management business.

The credit rating actions also consider the progress made by BBPM in improving its asset quality profile. The Bank is now better positioned to withstand the highly uncertain operating environment, on the back of rising global trade tensions and heightened geopolitical risks. The Bank maintained adequate capital buffers in 2024; however, Morningstar DBRS expects BBPM's regulatory capital ratios to decrease in the short term because of the acquisition of Anima. The capital impact on the Bank's CET1 ratio is expected at roughly 268 basis points (bps)1, following negative feedback from the European Central Bank regarding the use of the capital treatment (the so-called Danish Compromise). Nonetheless, Morningstar DBRS expects BBPM's CET1 ratio to remain above 13%, in line with management targets. The Stable trend incorporates Morningstar DBRS' view that risks to the credit ratings are broadly balanced.

In addition, Morningstar DBRS notes that, as part of the ongoing banking consolidation in Italy, BBPM is currently subject to a public exchange offer made by UniCredit S.p.A. (UniCredit). The tender period will start on 28 April 2025 and closes on 23 June 2025. Morningstar DBRS will continue to monitor this transaction and make a full assessment if it is successfully completed.

The Bank's Long-Term Senior Debt and Long-Term Deposits are both positioned in line with the Republic of Italy's BBB (high) sovereign credit rating.

The Bank's IA of BBB (high) is at the lower end of the IA range. Morningstar DBRS sees it as unlikely that the Bank's IA would be above the sovereign credit rating, which is currently at BBB (high), given its business concentration in the domestic market and its significant exposure to Italian sovereign bonds.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require further demonstration of improved profitability, as well as a continued commitment to maintain adequate asset quality profile and solid capital position despite the recent acquisition. Further progress with the integration of Anima would also lead to positive credit rating implications in the medium to long term. Given the current credit rating level, an upgrade of the credit ratings would also require an upgrade of the Republic of Italy's sovereign credit rating.

The credit ratings would be downgraded should the Bank's capital ratios fall significantly below Morningstar DBRS' expectations. A sustained weakening of profitability metrics or asset quality could also lead to a downgrade. Given the current credit rating level, a downgrade of the Bank's credit ratings would also result from a downgrade of the Republic of Italy's sovereign credit rating.

The Bank's credit ratings could be also susceptible to change in case of acquisition by UniCredit.

CREDIT RATING RATIONALE

Franchise Combined Building Block Assessment: Good/Moderate
BBPM is the third-largest Italian bank with EUR 198.2 billion in total assets and 1,358 domestic commercial branches at YE2024. BBPM was formed from the merger of the former Banco Popolare and the former Banca Popolare di Milano on 1 January 2017. BBPM's franchise is underpinned by solid market shares in Northern Italy, especially across the wealthy regions of Lombardy, Veneto, and Piedmont. As part of its reorganisation, BBPM has taken several steps to diversify its business mix. After the reorganisation of its insurance activities and the renewal of the commercial agreement in consumer finance, the Bank announced the creation of Numia in 2024, Italy's second-largest e-payments business, together with the private equity fund FSI and Gruppo Bancario Cooperativo Iccrea.

Moreover, in November 2024, the Bank made an offer to buy Anima, Italy's largest independent asset manager, through its insurance subsidiary, Banco BPM Vita. At the end of the offering period, the Bank owned 89.95% of the shares in Anima. In Morningstar DBRS' view, the transaction will strengthen the Bank's revenue diversification, especially fee income, which Morningstar DBRS views positively, particularly in an environment of lower interest rates. Morningstar DBRS expects the integration process to be manageable considering BBPM's track record in managing acquisitions, as well as its long-standing relationship with Anima.

Earnings Combined Building Block Assessment: Good
In Morningstar DBRS' view, profitability has gradually improved through a combination of cost-saving initiatives, lower cost of risk, and improving core revenues. The Bank's revenues remained solid despite the lower interest rate environment and were supported by the resilience and diversification of its fee-generating business lines. At the same time, in 2024, the Bank continued to implement network optimisation measures to improve its operating efficiency.

For 2024, the Bank posted net income of EUR 1.9 billion, up from EUR 1.3 billion in 2023. Results for 2024 also included the capital gain from the Numia transaction, as well as the costs for the solidarity fund and for early retirement incentives. Despite tightening interest margins resulting from the lower interest environment, BBPM's net interest income increased 4.6% year over year (YOY) in 2024, on the back of managerial initiatives aimed at mitigating interest rate sensitivity and funding costs. In addition, core revenues benefitted from increased commission income, up 4.4% YOY. The Bank's cost-income ratio improved further in 2024 to 46.6%, mainly driven by higher revenues. The cost of risk was also down to 46 bps from 54 bps in 2023. The Bank's profits are expected to further benefit from the integration of Anima.

Risk Combined Building Block Assessment: Good/Moderate
In recent years, the Bank has made significant progress in reducing its nonperforming exposures (NPEs), mostly though disposals and securitisations, but also organic workouts. The total stock of NPEs decreased to EUR 2.9 billion at YE2024 from EUR 3.8 billion at YE2023, while the gross NPE ratio fell to 2.8% from 3.5% at YE2023. This compares favourably with the average for domestic peers. Risk is further mitigated by BBPM's high share of loans backed by collateral as well as state guarantees.

Morningstar DBRS expects the Bank's gross NPE ratio to remain stable and below 3% in line with the Bank's business plan for 2027. However, risks to asset quality are tilted to the downside, given the ongoing rising trade tensions and heightened geopolitical risks.

Funding and Liquidity Combined Building Block Assessment: Good/Moderate
Morningstar DBRS views BBPM's funding profile as solid, supported by a large and stable deposit base, which accounted for approximately 76% of the Bank's funding at YE2024. In addition, the Bank remains active in tapping the wholesale markets. Also supporting the credit ratings is the Bank's solid liquidity position. At YE2024, BBPM's total high-quality liquid assets were around EUR 27 billion, after the entire reimbursement of targeted longer-term refinancing operations III funds. The Bank reported liquidity coverage and net stable funding ratios well above the regulatory requirements at 132% and 126%, respectively, in 2024.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate
In Morningstar DBRS' view, BBPM maintains a robust capital position, underpinned by its improved earnings-generation capacity and regular capital reinforcement through issuances, which have diversified its capital base and strengthened its loss-absorbing capacity. The CET1 ratio was 15.0% at YE2024, up from 14.2% at YE2023 despite the growth in risk-weighted assets. Similarly, the total capital ratio stood at 20.3% at YE2024, up from 19.0% at YE2023. These provide BBPM with ample cushion above the minimum capital requirements.

In the short term, the acquisition of Anima will likely have a negative capital impact of 268 bps1, mostly because of the capital deduction of goodwill. However, Morningstar DBRS expects this impact to be gradually absorbed by stronger earnings and other capital management actions. Morningstar DBRS expects BBPM's CET1 ratio to remain above 13% throughout its 2024-27 strategic plan.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/452114.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Credit rating actions on the Republic of Italy are likely to have an impact on these credit ratings. 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 Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

Notes:
Note (1). Based on BBPM's estimates and assuming the achievement of a 100% stake in Anima.

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, BBPM Q4 2024 Presentation, BBPM Q4 2024 Press Release, BBPM 2024 Annual 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' 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://dbrs.morningstar.com/research/452113.

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: William Schwartz, Associate Credit Rating Officer, Global Fundamental Ratings, Credit Practices
Initial Rating Date: 5 January 2017
Last Rating Date: 4 November 2024

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