Morningstar DBRS Confirms BFF Bank S.p.A.'s Long-Term Issuer Rating at BB (high), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on BFF Bank S.p.A. (BFF or the Bank), including the Long-Term Issuer Rating at BB (high) and the Short-Term Issuer Rating at R-3. In addition, Morningstar DBRS confirmed the credit ratings on the Bank's Long-Term Deposits at BBB (low), one notch above the Bank's 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 credit ratings is Stable. Morningstar DBRS also confirmed the Bank's IA at BB (high) and Support Assessment at SA3, meaning that timely systemic support is not expected. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of BFF's credit ratings reflects the Bank's small size as well as its leading position in the niche sector of management and nonrecourse factoring of trade receivables due from the public administration (PA) and the national healthcare system (NHS), as well as its degree of diversification by geography and business activity. BFF's earnings power remains adequate, mainly supported by steadily low credit costs, and despite lower interest rates and somewhat weaker operating efficiency.

The credit ratings also incorporate the mostly wholesale, albeit operational, nature of BFF's funding structure and the high, albeit reduced, concentration risk arising from the Bank's sizeable exposure to Italian sovereign bonds. These factors are, however, counterbalanced by a sound liquidity position.

In May 2024, BFF received some findings from the Bank of Italy (BOI) regarding its credit classification as well as its governance and corporate compensation practices. The Stable trend considers that, notwithstanding the uncertainty heightened by the BOI's findings, which remain subject to a final decision, BFF's franchise and its funding and liquidity position have not experienced any material stress to date. BFF's capitalisation and asset quality metrics have been negatively affected by the prudential reclassification of some public sector credit exposures as past due resulting from the findings; however, in Morningstar DBRS' view, the Bank's capitalisation and asset quality profiles remain commensurate with its business model, which mainly reflects the concentration of its operations in the typically low-risk public sector. Morningstar DBRS considers the progress BFF has achieved in reducing its past due exposures since the credit reclassification in June 2024 through the optimisation of its collection process and expects this commitment to remain in place. In addition, Morningstar DBRS expects BFF's profitability to remain resilient under the assumption that credit losses on public sector exposures remain low. In Morningstar DBRS' view, the temporary ban imposed by the BOI, mostly concerning dividend distributions, payment of variable remuneration, and business expansion abroad by opening new branches or expanding into new countries under freedom of services rules, continues to ensure capital protection until a final decision is taken.

The Bank's IA is positioned at the midpoint of the Intrinsic Assessment Range to reflect that BFF's credit fundamentals and performance are commensurate with those of its similarly rated peers.

CREDIT RATING DRIVERS
An upgrade of BFF's credit ratings would require the resolution of the regulatory findings, including progress in the Bank's corporate governance structure, and the Bank to reduce its past due exposures. An upgrade would also require BFF's further commitment to reducing its concentration risk related to the Italian sovereign bond portfolio and/or its reliance on wholesale, albeit operational, funding sources while maintaining sound profitability and capital buffers.

A credit rating downgrade would likely be driven by a material deterioration in the Bank's capitalisation and/or an effective increase in credit risk. Any sign of significant worsening in the Bank's franchise and/or funding and liquidity profile, possibly triggered by the uncertainty associated with the ongoing regulator's probe, would also contribute to a downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Weak
With approximately EUR 12 billion in total assets at the end of March 2025, BFF is a small Italian bank specialised in the management and nonrecourse factoring of trade receivables due from the PA and NHS. While holding a market share of less than 2% in the overall Italian factoring industry, BFF is a leader in niche factoring with PA and NHS. The Bank has grown its factoring and lending business across Europe over the years organically and inorganically via acquisitions of Magellan S.A. in Poland, and IOS Finance, E.F.C., S.A. in Spain. As a result, BFF currently operates in nine European countries, and Italy remains the main market. In addition, in 2021, BFF entered the securities services and banking and corporate payment businesses in Italy through the acquisition of DEPObank - Banca Depositaria Italiana S.p.A. (DEPObank). Since 2017, BFF has been listed on the Italian stock exchange, and at the end of March 2025, 94% of its shares were floating on the market. Morningstar DBRS notes that BFF made some changes to its corporate governance to comply with BOI's findings.

Earnings Combined Building Block Assessment: Good
While including some positive one-off items in recent years, BFF's core earnings power remains good, mainly driven by low credit costs and despite lower interest rates and somewhat weaker operating efficiency. Morningstar DBRS expects BFF's profitability to remain resilient albeit more moderate relative to the higher capital required following the credit reclassification. The higher upfront recognition of the Bank's main revenues, coupled with the typically faster repricing of its funding structure than its assets, as well as growing volumes in the factoring business, good operating efficiency, and low credit costs, will help BFF maintain adequate profitability levels.

The Bank's net income was down 10% year over year (YOY) in Q1 2025, implying an annualised return on equity of 15%, down from 20% in Q1 2024, mainly driven by the capital accumulated because of the dividend distribution ban. Total revenues were down 5% YOY in Q1 2025 affected by lower revenues from the factoring and lending business, and a lower contribution from the government bond portfolio. Revenues mainly consist of net interest income (NII) from the purchase of discounted invoices and late payment interests (LPIs) on overdue invoices, as well as other revenue from recovery cost rights. Based on the way BFF accounts for LPIs and recovery cost rights, at the end of March 2025, the Bank had EUR 548 million in off-balance profit reserves not recognised in its profits and losses, down 13% YOY because of the increase in the accrual rate of LPIs and recovery cost rights. NII decreased by 8% YOY in Q1 2025, whereas net fees, mostly attributable to the securities services and payment businesses, were up 2% YOY and represented 21% of total revenues in Q1 2025. BFF's cost-to-income ratio increased to 48% in Q1 2025 from 47% in Q1 2024, while the Bank's annualised cost of risk remained at a low 4 basis points (bps) in Q1 2025.

Risk Combined Building Block Assessment: Weak/Very Weak
Morningstar DBRS considers BFF's risk profile as adequate given its business focus on PA and despite the prudential reclassification of some credit exposures as past due. While the PA consistently pays its invoices late, credit losses are significantly lower than those for the private sector. BFF's customer loan book reached around EUR 5.8 billion at the end of March 2025, up 5% YOY, and was mainly concentrated in Italy. BFF's gross nonperforming exposure (NPE) ratio significantly increased to 33.9% at the end of March 2025 (or 33.6% net of provisions) from 6.8% at YE2023 because of the credit reclassification. However, NPEs mostly consist of past due arising from late payments from the PA and exposures to municipalities in conservatorship which are classified as bad loans by regulation despite BFF's legal entitlement to receive 100% of the principal and LPIs at the end of the recovery process. The total NPE coverage ratio was around 1% at the end of March 2025 and has been historically low, because of BFF's high NPE recovery rate. Gross stage 2 loans (loans where credit risk has increased since origination) represented around 1% at YE2024, down from 10% one year earlier, as most stage 2 loans moved to stage 3 following the prudential reclassification.

BFF maintains a large exposure to Italian sovereign bonds which totalled around EUR 4.6 billion at the end of March 2025, up 1% compared with that at YE2024 but down 7% YOY. The sovereign bond portfolio represented 37% of BFF's total assets and 6.8 times (x) its CET1 capital at the end of March 2025, down from 41% and 11.5x, respectively, one year earlier. The exposure is fully classified as held to collect, and its fair value was higher than its carrying value at the end of March 2025.

Funding and Liquidity Combined Building Block Assessment: Moderate
BFF's funding profile has improved since the acquisition of DEPObank; however, the diversification of its funding remains moderate and its reliance on wholesale sources remains significant, exposing the Bank to market trends and funding concentration risk. Total deposits, including customer and bank deposits, were flat compared with YE2024, but they were down 5% YOY as deposit inflows from transaction services have only partly offset a reduction in digital deposits according to BFF's funding strategy. As a result, total deposits accounted for 80% of total funding at the end of March 2025, of which 77% came from transaction services. Albeit to a lesser extent, BFF regularly makes use of short-term repurchase agreements backed by sovereign bonds. With the aim to fulfil the minimum requirement for own funds and eligible liabilities effective from January 2025, BFF issued two senior preferred bonds in 2024 for a total consideration of EUR 600 million. At the end of March 2025, BFF's liquidity coverage ratio was 260.5% and its net stable funding ratio was 140.0%.

Capitalisation Combined Building Block Assessment: Moderate/Weak
Morningstar DBRS sees BFF's capital position as commensurate with its risk profile given its asset concentration in the public sector. The Bank's capital position is underpinned by its sustained earnings generation despite the higher capital absorption from the credit reclassification. However, the Bank's dividend policy, subject to the removal of the ban by the BOI, limits its ability to grow capital organically. Morningstar DBRS expects BFF to hold more moderate capital buffers than the historical average because of higher capital absorption from the factoring business and higher regulatory requirements, under the assumption that dividend distributions will resume as planned. Nonetheless, the continued commitment in reducing its past due exposures will help the Bank maintain adequate capital buffers.

At the end of March 2025, BFF reported a CET1 ratio of 13.7% and a total capital ratio of 16.7% (including net profit given the dividend distribution ban), which compare with 13.5% and 18.2% respectively reported one year earlier before the credit reclassification. As a result, at the end of March 2025, BFF held adequate buffers of 430 bps and 380 bps over its minimum requirements for CET1 and total capital ratios, respectively. The Bank's leverage ratio was 6.4% at the end of March 2025, up from 4.8% one year earlier, driven by capital accumulation. BFF paid approximately EUR 800 million in dividends since its initial public offering in 2017, equivalent to around 67% of net attributable income reported in the same period.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/456456.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Governance (G) Factors
Morningstar DBRS considers the following G factor as relevant to BFF's credit ratings, in particular the subfactor Corporate Governance. Following an inspection by the BOI concluded in January 2024, BFF has received some findings, including on its corporate governance and corporate compensation practices. While BFF has had a new board of directors since April 2024, reflecting greater independence and diversity, as well as a new remuneration policy, a final resolution is yet to be received from the BOI. In May 2025, the BOI notified the Bank, and its chief executive officer of administrative pecuniary sanctions issued at the conclusion of the inspection.

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 (16 May 2025) https://dbrs.morningstar.com/research/454196.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 May 2025) https://dbrs.morningstar.com/research/454637. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/454196 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, BFF Q1 2025 Results Press Release, BFF Q1 2025 Results Presentation, BFF 2020-2024 Annual Reports, BFF 2024 Pillar 3 Report, BFF 2024 Country by Country Reporting, and Assifact Q1 2025 Report. 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' 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/456455.

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: Nicola De Caro, Senior Vice President, Sector Lead - European Financial Institution Ratings
Initial Rating Date: 19 July 2023
Last Rating Date: 20 June 2024

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