DBRS Confirms BPAA’s Senior Ratings to BBB (low); Trend Remains Negative

DBRS Ratings Limited (DBRS) has today confirmed its ratings on Banca Popolare dell'Alto Adige SpA (BPAA or the Bank). These include the Senior Long-Term Debt and Deposit rating of BBB (low), as well as the Short-Term Debt & Deposit rating of R-2 (middle). The trend on the ratings remains Negative. Concurrently, DBRS maintained the Bank’s Intrinsic Assessment at BBB (low) and support designation at SA3.

The confirmation of the ratings takes into consideration BPAA’s transformation into joint-stock company (SpA) and progress in the integration of Banca Popolare di Marostica, as well as its adequate funding and liquidity position. In addition, in confirming the ratings, DBRS has taken into account the steps currently being undertaken by the Bank to strengthen its risk management and improve profitability. The Negative Trend, however, reflects the ongoing asset quality challenges which will likely weigh on the Bank’s profitability for some time.

The Bank maintains a solid market position in the region of Trentino Alto Adige. In 2016, BPAA transformed itself into joint stock-company with the approval of 97.5% of the shareholders’ meeting, while also making progress with the integration of Banca Popolare di Marostica. As part of the business plan for 2017-2021, the Bank is taking steps to improve its profitability and risk profile via a number of actions including increased focus on Corporate clients, SMEs and private banking, cost rationalisation, investments in IT as well as the creation of a workout unit to manage non-performing loans (NPLs).

The Bank’s profitability weakened in 2016. BPAA posted a net profit of EUR 8 million, down from EUR 22 million in 2015, mainly as a result of higher loan loss provisions (LLPs) triggered by a supervisory inspection of the Bank of Italy. The results, however, benefitted from the tax benefit on the goodwill linked to the acquisition of Banca Popolare di Marostica, as well as capital gains on the sale of real estate assets.

BPAA’s asset quality deteriorated following the acquisition of Banca Popolare di Marostica in 2015, as well as the incremental reclassification triggered by the supervision inspection in 2016. The Bank’s total stock of NPLs increased to EUR 1,163 million, corresponding to 16% of the total gross loans, from EUR 1,048 million in 2015. Concurrently, the Bank strengthened its provisioning levels with the total coverage ratio up to 43% from 40% in 2015, whilst the coverage for bad debts (or “sofferenze”) improved to 54% from 51%. In DBRS’ view, the recent creation of the workout unit together with higher provisioning levels should help BPAA to gradually improve its asset quality profile.

In 2016, BPAA maintained an adequate funding and liquidity position. The Bank is mainly funded by deposits with retail, SME and corporate clients. At December 2016, the total stock of time and sight deposits increased to EUR 5.2 billion from EUR 4.6 billion at end-2015, while the stock of bonds, mostly with retail clients, decreased by roughly 30% YoY to EUR 1.1 billion. On the wholesale market, the Bank has maintained consistent access to securitisation market. In addition, BPAA continues to benefit from the favorable ECB funding programs. In terms of liquidity, at YE 2016, the Bank reported a liquidity coverage ratio (LCR) of 120% and a stock of free eligible assets of EUR 824 million.

The Bank’s capital position improved in 2016 mainly as a result of a EUR 96 million capital increase. The positive effect, however, was largely offset by an increase in risk weighted assets. At YE2016, BPAA reported both CET1 ratio and total capital ratio at 11.7% versus 11.2% in 2015. However, in the short term, capital pressure might arise from the potential buyback of the shares from the shareholders who have exercised the right of withdrawal in the context of the Bank’s transformation into a joint-stock company. This is still subject to the pending decision of the Constitutional court.

RATING DRIVERS
A reduction in the stock of NPLs supported by adequate capital levels could contribute to change the Trend to Stable. Negative rating implications could result from any failure to improve the Bank’s asset quality, as well as material deterioration in capital and liquidity, or should the bank face challenges in achieving its business plan goals.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

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 18, 2014
Most Recent Rating Update: June 15, 2016

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