DBRS Downgrades Creval’s Senior Ratings to BB (high); Trend is now Stable

DBRS Ratings Limited (DBRS) has today lowered Credito Valtellinese SpA’s (Creval or the Bank) Issuer and Senior Long-Term Debt and Deposits ratings to BB (high) from BBB (low), while the Bank’s Short-Term Debt and Deposits rating was downgraded to R-3, from R-2 (low). Concurrently the Bank’s Intrinsic Assessment (IA) was also lowered to BB (high), from BBB (low), whilst the support designation was maintained at SA3. The Bank’s mandatory pay subordinated debt was downgraded to BB (low). The trend on all ratings is now Stable. A full list of ratings actions is included at the end of this press release.

The lowering of Creval’s IA takes into consideration the Bank’s weak asset quality. Despite the planned de-risking, which envisages a reduction of approximately EUR 2 billion in non-performing loans (NPLs) by year-end 2018, Creval’s total stock of NPLs remains large. In DBRS’ opinion this will likely continue to affect the Bank’s future performance and capital position. The stable trend reflects DBRS’ expectation that Creval will continue to make progress towards its targets for efficiency and asset quality set out in the Bank’s business plan for 2017-2018, as well as maintain its adequate funding and liquidity profile.

In DBRS’ view, Creval maintains a stable market position, especially in its home province of Sondrio (Lombardy). The Bank continues to take steps to restructure its business model as well as improve its risk profile. As part of the new business plan for 2017-2018, the Bank targets: (1) a rationalisation of its branch distribution network while also strengthening its online presence, (2) an improvement in the revenue mix by increasing the commercial focus on bancassurance and factoring, (3) a reduction in NPLs with a combination of disposals and workout measures. The Bank is also considering merger options.

Creval’s profitability remains weak. In 2016, the Bank reported a net loss of EUR 333 million, mainly due to high loan loss provisions, as well as weak revenues and one-off restructuring costs. In 1Q17, the Bank reported a net profit of EUR 2 million, down from EUR 5 million in 1Q16. The large stock of NPLs and related high provisioning levels are likely to continue to pressure the Bank’s future performance, in DBRS’ view.

In 1Q17 the Bank’s stock of NPLs reduced slightly to EUR 5.3 billion gross (or EUR 3.1 billion net of provisions) corresponding to 27.2% of the total gross loans (or 18% on a net basis), from EUR 5.4 billion at end-2016 (or EUR 3.2 billion net of provisions). The reduction was supported by EUR 557 million in NPL disposals as well as higher provisioning levels, with the total NPL cash coverage ratio increasing to 42% (44% including write-offs), from 41% at end-2016 and 37% at end-1Q16. According to the business plan for 2017-2018, Creval is targeting a EUR 2 billion reduction in gross NPLs by 2018, mainly through disposals planned in 2017 which could reach approximately EUR 1.5 billion. As a result, the Bank’s NPL ratios are expected to improve to around 18% gross and 11.5% net of provisions in 2018. Despite that, DBRS continues to view the Bank’s remaining stock of NPLs as large.

Creval maintains an adequate funding profile, which is underpinned by its stable retail funding base and limited reliance on wholesale funds. With EUR 3.5 billion in unencumbered assets at March 2017, the Group has a sizeable buffer for future bond maturities.

Creval’s capital buffer deteriorated due to the significant loss reported in 2016. In particular the Bank’s CET1 ratio decreased to 11.6% at March 2017, from 13.2% a year earlier, whilst the Total capital ratio deteriorated to 12.7%, from 14.9% at March 2016. However the Bank’s Total capital ratio improved in April 2017 following the issuance of EUR 150 million in Tier 2 subordinated bonds. Nevertheless, in DBRS’ view, Creval’s capital buffers remain vulnerable given the large stock of unreserved NPLs. In the short term, capital pressure might arise from the planned disposal of NPLs. This pressure might be alleviated by the sale of some real estate assets as well as the planned adoption of the advanced internal ratings based models (A-IRB).

RATING DRIVERS
Although DBRS views positive rating pressure as limited in the short term, a significant improvement in the Bank’s asset quality, profitability and capital position could contribute to positive rating pressure in the medium term. Conversely, negative rating implications could result from any material deterioration in the Bank’s capital and liquidity profile, or should the Bank face challenges in reducing its NPL stock in line with the 2017-2018 business plan.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). Other applicable methodologies include the DBRS Criteria: Guarantees and Other Forms of Support (February 2017). These can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Nicola De Caro, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG - Global FIG

Initial Rating Date: February 7, 2013
Most Recent Rating Update: June 9, 2017

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