Morningstar DBRS Confirms Mediocredito Centrale - Banca del Mezzogiorno S.p.A.'s Long-Term Issuer Rating at BBB, Positive Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on Mediocredito Centrale - Banca del Mezzogiorno S.p.A. (MCC or the Bank), including the Long-Term Issuer Rating at BBB and the Short-Term Issuer Rating at R-2 (high). At the same time, Morningstar DBRS confirmed the Bank's Long-Term Deposits credit rating at BBB (high), one notch above its Long-Term Issuer Rating, reflecting the legal framework in place in the Republic of Italy (Italy), which has full depositor preference in bank insolvency and resolution proceedings. The trends on the Bank's long-term credit ratings remain Positive. The Bank's Support Assessment is SA1, meaning that its credit ratings are primarily driven by Morningstar DBRS' expectation for support provided to the Bank by its main shareholder. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
MCC's Support Assessment of SA1 implies the expectation of predictable support from its main shareholder, Agenzia nazionale per l'attrazione degli investimenti e lo sviluppo d'impresa S.p.A. (Invitalia), which is, in turn, fully owned by the Italian government. Morningstar DBRS rates Italy's Long-Term Foreign Currency - Issuer Rating and Long-Term Local Currency - Issuer Rating at BBB (high) with Positive trends. (For more details on the rationale for the sovereign credit rating action, please refer to the press release titled "Morningstar DBRS Confirms Republic of Italy at BBB (high), Positive Trend" at https://dbrs.morningstar.com/research/452176).

MCC's Long-Term Issuer Rating is one notch below Italy's Long-Term Foreign Currency - Issuer Rating and Long-Term Local Currency - Issuer Rating. This implies that, despite the expectation of predictable support, there is no government guarantee or explicit commitment to maintain the Bank's capitalisation. Nevertheless, Morningstar DBRS expects support to MCC from the Italian state to be forthcoming when the need arises because of the Bank's ownership and its strategic public mission. Morningstar DBRS also notes that, because of its ownership and the expectation of support, MCC's credit ratings are positioned multiple notches above the entity's intrinsic creditworthiness. The Positive trends mirror the trend on Italy's long-term credit ratings.

CREDIT RATING DRIVERS
An upgrade of Italy's credit ratings would likely lead to an upgrade of MCC's credit ratings. Also, an upgrade of MCC's Long-Term Issuer Rating could be driven by the Italian government's explicit guarantee and commitment of support to the Bank.

A downgrade of MCC's credit ratings would result from a downgrade of Italy's sovereign credit rating or a material deterioration in the Bank's earnings power, risk profile, and capital position. In addition, any indication of a weakening of the commitment from the Italian government and/or a change of control in the Bank's ownership structure could also lead to a downgrade.

CREDIT RATING RATIONALE
MCC, a small public bank with around EUR 14.5 billion in total assets at the end of March 2025, is responsible for providing support to small and medium-size enterprises (SMEs) and households, particularly in Southern Italy, mainly through financing and strategic partnerships while managing and providing public incentives and public subsidies. Morningstar DBRS expects support to MCC from the Italian state to be forthcoming in case of need because of the Bank's ownership and its public mission, which Morningstar DBRS deems to be the key pillars underpinning MCC's credit ratings. Since 2017, MCC has been fully owned by the Italian government by indirect ownership through Invitalia, which in turn is fully owned by the Ministry of Economy and Finance. In partnership with Italy's Interbank Deposit Protection Fund, MCC was involved in the 2020 rescue of BdM Banca S.p.A. (BdM; formerly Banca Popolare di Bari S.p.A.) and has become the parent company of Gruppo Mediocredito Centrale, a banking group comprising MCC, BdM, and Cassa di Risparmio di Orvieto S.p.A. (CRO), a former subsidiary of BdM that has since been carved out. Nevertheless, MCC is in the process of disposing of its full stake held in CRO to Banca del Fucino.

MCC's earnings power has improved since the acquisition of BdM, supported by higher interest rates, loan growth, and revenue diversification, as well as enhanced cost discipline, lower loan loss provisions, and reduced legal risks. In Morningstar DBRS' view, revenue diversification coupled with cost savings and synergies from the progressive integration of BdM should help MCC offset the negative impact on profitability from lower interest rates, higher digital investments, potentially higher credit costs because of additional loan cleanup at BdM and trade tensions, and the carveout of CRO. MCC reported a net attributable income of EUR 29 million in Q1 2025, up 14% year over year (YOY), mainly resulting from BdM's improved profitability and some positive consolidation effects. Total revenues were up 26% YOY in Q1 2025, supported by all revenue sources. The Bank's net interest income was up 5% YOY in Q1 2025, as lower interest rates have been more than offset by higher loan volumes, higher contribution from the fixed income securities, and funding cost optimisation. Net fees, accounting for 34% of MCC's revenue mix, were up 21% YOY in Q1 2025, while trading activity and positive revaluation of certain investments underpinned the Bank's revenues further. MCC's operating efficiency has significantly improved, with a cost-to-income ratio falling to around 62% in Q1 2025 from 77% in Q1 2024. MCC's annualised cost of risk (COR) stood at a high 95 basis points (bps) in Q1 2025, up from 80 bps in 2024; however, the underlying COR, excluding provisions for derisking, was almost unchanged at around 52 bps in Q1 2025.

Morningstar DBRS views MCC's risk profile as weak, albeit improved, considering its gross nonperforming exposure (NPE) ratio of 6.4% as reported by the Bank at the end of March 2025, including impaired securities guaranteed by the Fondo di Garanzia sulla Cartolarizzazione delle Sofferenze, down from 9.2% at YE2021. On a net basis, the NPE ratio was 4% at the end of March 2025, down from 5.6% at YE2021. The total NPE coverage increased to 48% at the end of March 2025 from around 46% at YE2024. Gross stage 2 loans (loans where credit risk has increased since origination) accounted for around 11% of MCC's gross loans at YE2024, up from 9% at YE2023. Most of MCC's loan book is concentrated in SMEs and households, and this implies a low single-name concentration. In addition, a significant portion of MCC's loan portfolio benefits from state guarantees. Morningstar DBRS sees increased risks for asset quality going forward because of global trade tensions and sluggish economic activity. The concentration of MCC's exposures in SMEs, particularly in more vulnerable Southern Italy, adds further risk to asset quality. However, MCC's lending standards have tightened recently, leading to better-quality new originations. This, coupled with further derisking and some support to credit expansion as interest rates ease and commercial revamping at BdM progresses, should help mitigate the negative impact on the Bank's asset quality. MCC still bears significant, albeit reduced, legal risks, mainly attributable to BdM's operations prior to its acquisition by MCC.

MCC is exposed to sovereign risk via its Italian government bonds, which totalled around EUR 2.2 billion at the end of March 2025, down 28% compared with YE2023 and equivalent to around 15% of its total assets. At YE2024, MCC's government bond portfolio represented approximately 2.1 times its CET1 capital, significantly lower than in the past driven by a reduction in the exposure and capital accumulation. The portfolio was entirely classified as hold to collect and sell, resulting in a direct impact on the Bank's equity from the volatility in credit spreads; however, the Bank has materially reduced the negative impact on its valuation reserves from the securities portfolio over the years thanks to active management of the portfolio.

MCC's funding profile has improved since the acquisition of BdM, which provided a granular and sticky deposit base, and is therefore more aligned with MCC's asset structure. In Morningstar DBRS' view, the likelihood for MCC to receive funding support from its shareholder if required remains high considering its public policy mission. Due to customers, mainly consisting of deposits raised from individuals and SMEs, represented MCC's main source of funding at around 78% of its total funding at the end of March 2025. The Bank's net loan-to-deposit ratio, as calculated by Morningstar DBRS, has remained below 100% in recent times. MCC's reliance on bank financing reduced to around 9% of total funding at the end of March 2025 driven by targeted longer-term refinancing operation repayments to the European Central Bank (ECB). MCC makes regular use of short-term repurchase agreements, pledging its government bonds as collateral. Debt securities issued, mostly consisting of senior instruments and, residually, securitisations and subordinated bonds, represented around 13% of MCC's total funding at the end of March 2025, up from 7% at the end of March 2024, driven by the issuance of two social senior preferred bonds for a total consideration of EUR 900 million. The Bank's liquidity coverage ratio was 169% at the end of March 2025, whereas its net stable funding ratio was above 100%, and the Bank can rely on approximately EUR 2.7 billion in readily available liquidity, mostly consisting of ECB eligible assets, deposit facilities with the ECB, and cash.

The integration of BdM has negatively affected MCC's capitalisation given the higher level of risk inherited relative to BdM's earnings accumulation capacity. However, MCC's capitalisation has gradually improved, mainly on the back of improved earnings generation as well as derisking, positive effects in the valuation reserves, and capital management actions. At YE2024, the Bank's CET1 and total capital ratios, including profit for the period, were 15.0% and 16.2%, respectively, up from 13.0% and 14.2% at YE2023. The capital ratios provide adequate cushions over the Bank's minimum supervisory requirements of 8.6% for the CET1 ratio and 13.0% for the total capital ratio applicable from 31 March 2025. Requirements include a Pillar 2 requirement of 2.00%, up from the previous 1.85%. The current capital ratios are also above the requirements of 10.6% for the CET1 ratio and 15.0% for the total capital ratio when including a Pillar 2 guidance (P2G) of 2%. The minimum requirements, including P2G, will increase to 11.1% and 15.5%, respectively, from the end of June 2025. However, the sale of CRO will contribute to strengthen the Bank's capital ratios by around 180 bps according to its estimates, which will be absorbed by just 5 bps from its planned redemption of a Tier 2 subordinated bond.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Governance (G) Factors
Morningstar DBRS considers the Governance factor as relevant to MCC's credit ratings at this point, in particular the subfactor Corporate Governance; however, it does not affect the credit ratings or trends assigned to MCC. The Bank suffered financial and reputational damage because of conduct issues and mismanagement at BdM prior to its acquisition by MCC.

The following Social and Governance factors had a significant effect on the credit analysis: Pass-through Social and Governance credit considerations. The Social and Governance factors affect MCC as the ESG factors for Italy are passed through to MCC.

There were no Environmental factors that had a significant or relevant effect on the credit analysis.

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://dbrs.morningstar.com/issuers/17689.

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, MCC Q1 2025 results press release, MCC Q1 2025 to F2024 results presentation, MCC 2020 to 2024 annual reports, MCC 2024 Pillar 3 report, and MCC bylaws. 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/458012.

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: 22 July 2024
Last Rating Date: 4 November 2024

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