DBRS Confirms Creval at BB/R-4; Trend Now Positive

DBRS Ratings Limited (DBRS) confirmed Credito Valtellinese SpA’s (Creval or the Bank) Long-Term Issuer Rating as well as its Long-Term Senior Debt and Long-Term Deposits Ratings at BB. Concurrently, the Bank’s Short-Term Issuer Rating was confirmed at R-4. The trend on all ratings is now Positive. With this action, DBRS concluded the rating review which was initiated in November 2017 and then extended in February 2018. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings and the Positive Trend reflect the Bank’s successful capital increase. On March 20, 2018, Creval announced that its EUR 700 million share issue launched on February 19, 2018, was fully subscribed. The strengthened capital position allows Creval to materially improve its asset quality profile as well as progress with its restructuring plan. In line with the plan announced in November 2017, Creval expects to (i) reduce its gross Non-Performing Exposures (NPE) ratio to 10.5% in 2018, from 21.7% at YE2017, via disposals for approximately EUR 2 billion; (ii) strengthen provisioning levels to 50.3% in 2018, from 45.3% at end-2017; (iii) improve efficiency and capital via a number of restructuring actions including corporate simplification and asset sales.

Nonetheless, DBRS ratings on Creval also incorporate the view that (i) Creval’s asset quality metrics, post disposals, will continue to compare unfavorably with the European average; (ii) the Bank's ability to generate adequate profitability will improve only gradually.

RATING DRIVERS

Further positive rating pressure would require (i) a successful execution of the Bank’s NPE disposal plan for 2018, and (ii) an improvement in cost of risk and efficiency levels. Negative rating implications are unlikely in the short term, given the Positive trend. However, downward rating pressures could arise should the Bank face challenges in (i) maintaining an adequate capital position or (ii) reducing NPEs. Any material deterioration in the Bank’s franchise could also contribute to negative rating pressure.

RATING RATIONALE

Creval is a small-medium sized Bank, with a significant presence in the region of Lombardy, especially in its home province of Sondrio. Since 2011, the Bank has continued to streamline its operations by reducing the number of legal entities, closing retail branches and reducing the number of employees. As part of the business plan, Creval expects to close 62 branches together with the exit of more than 170 employees by 2020. Furthermore, the Bank will invest in IT and digitalisation.

The Bank’s profitability remained weak in 2017. Creval reported a net loss of EUR 332 million in 2017, broadly in line with the loss posted in 2016. The results were mainly impacted by high cost of risk due to NPE disposals as well as the adoption of more conservative credit policies. DBRS expects Creval’s profitability to improve only gradually. The Bank will likely continue to face the challenges stemming from the low interest rate environment, high market competition and still large NPE stock.

At end-2017 Creval reported a very weak asset quality profile, with a stock of gross NPEs of EUR 4.0 billion (EUR 2.2 billion, net of provisions), corresponding to 21.7% of the Bank’s gross loans (13.2% net). The Bank expects to halve its gross NPE ratio to 10.5% in 2018, via a combination of sales and securitisation, with the GACS Scheme, for approximately EUR 2 billion. The Bank’s NPE ratios, however, will remain higher than the European average. As part of the de-risking plan, Creval expects to strengthen coverage on bad loans to 74.2% and Unlikely to Pay (UTP) to 44.9% at end-2018, from 62.3% and 33.6% at end-2017. The bulk of the losses resulting from NPE disposals and strengthening in coverage levels will be diluted over 5 years with the IFRS9 first-time adoption.

Creval has maintained an adequate liquidity profile, despite the recent challenges linked to the recapitalisation process. The Bank’s liquidity position is underpinned by a resilient retail deposit base and large stock of unencumbered assets. At end-December 2017, Creval’s LCR and NSFR were above 100%.

Creval’s capital position has improved thanks to the capital increase of EUR 700 million. DBRS expects Creval’s CET1 ratio (fully loaded) to be approximately 11%, including the losses from the ongoing de-risking plan and the impact from the IFRS 9 first-time adoption. Additional capital support is expected from pending asset disposals and the adoption of the advanced internal ratings based (AIRB) in 2018.

The Grid Summary Grades for Credito Valtellinese SpA are as follows: Franchise Strength – Moderate; Earnings – Weak; Risk Profile – Moderate / Weak; Funding & Liquidity – Moderate; Capitalisation – Moderate / Weak.

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). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports. 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 and US 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: February 09, 2017

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