DBRS Confirms Banca Monte dei Paschi di Siena’s B (high)/R-4 ratings; Stable Trend

DBRS Ratings Limited (DBRS) confirmed the ratings of Banca Monte dei Paschi di Siena SpA (BMPS or the Bank), including the Long-Term Issuer Rating of B (high) and the Short-Term Issuer Rating of R-4. The trend on all ratings remains Stable. Concurrently, DBRS maintained the Bank’s Intrinsic Assessment at B (high) and support assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of BMPS’s ratings with a Stable trend takes into account the Bank’s progress with its restructuring plan supported by: i) the completion of a Non-Performing Exposure (NPE) securitisation of EUR 24.1 billion and further investments in risk management, ii) improvement in efficiency from the exit of 1,800 employees and rationalisation of the branch network, iii) stabilisation in the funding position coupled with lower funding costs.

The ratings, however, continue to reflect the Bank’s still high stock of NPEs and the resulting negative impact on capital, as well as the challenges faced by the Bank in improving profitability.

RATING DRIVERS

Positive rating pressure would require further improvements in asset quality and efficiency, progress with the NPE disposal plan and improvements in revenue generation. Negative rating implications could result from a deterioration in investor sentiment, material weakening of the capital position and challenges in reducing NPEs.

RATING RATIONALE

BMPS is Italy’s fourth largest bank by total assets. The Bank has a nationwide retail and commercial banking franchise with a significant market share in the home region of Tuscany. The Bank is 68% controlled by the Italian Ministry of Finance following a precautionary recapitalisation completed in August 2017.

As a result of State Aid procedures, the Bank agreed with the European Commission to undertake a substantial restructuring plan over the period 2017-2021. Key achievements to date include the closure of 435 branches, the exit of 1,800 employees, as well as the reorganisation of the credit risk structure and reduction in NPEs. In addition, the Bank has taken steps to strengthen its commercial structure and improve controls. After repeated periods of stress, the Bank was able to recover deposits and reduce funding costs. Stability in the Bank’s customer franchise and investor confidence remains a key component of a successful restructuring plan. Any renewed headline risk and deterioration in market sentiment could contribute to increase in execution risks.

In 1Q 2018, the Bank reported net income of EUR 188 million following a net loss of EUR 169 million in the same period of 2017 and a loss of EUR 502 million in 4Q17. The results were supported by higher Net Interest Income (NII) thanks to lower funding costs and higher lending volumes, as well as gains in efficiency and lower cost of risk. Nonetheless, the Bank’s profitably will continue to be impacted by the ongoing restructuring and challenging operating environment.

The Bank’s risk profile is affected by its high stock of NPEs, large holding of Italian sovereign bonds and high litigation risks. The Bank is making progress in reducing its stock of NPEs. At 1Q18, total NPEs decreased to EUR 42.6 billion, corresponding to 34.2% of the Bank’s total gross loans, from EUR 42.9 billion at YE 2017. As part of the NPE plan, in May 2018, BMPS completed a NPE securitization for EUR 24.1 billion. The senior notes issued by the securitization vehicle for EUR 2.9 billion will benefit from the government guarantee scheme (GACS), and will be initially retained by BMPS. After the deconsolidation of the NPE portfolio, which is expected in 1H 2018, BMPS’ pro-forma gross NPE ratio would improve to 19.7% (or 9.9% net of provisions).

With the IFRS 9 first-time adoption (FTA), the Bank aims to reduce its gross NPE target for 2021 to 10% from 12.9% set in July 2017. In 1Q 2018, BMPS’s coverage levels strengthened to 68.8% from 65.5% at YE 2017. The higher provisioning levels are expected to support NPE disposals for approximately EUR 4 billion in 2H 2018. Improving default rates and a lower stock of unlikely to pay (UTP) loans should also contribute to further improvements in asset quality.

The Bank’s funding and liquidity stabilized in 2017 supported by improved depositor confidence following the completion of the precautionary recapitalisation. In January 2018, the Bank repaid EUR 3 billion in bonds with the government guarantee and regained access to the wholesale market with the issuance of subordinated Tier 2 notes of EUR 750 million. At March 2018, Bank reported an LCR of 195.7%, NSFR of 106%, and total unencumbered assets of EUR 19.6 billion, corresponding to 14.3% of the Bank’s total assets.

BMPS’ capital position strengthened with the precautionary recapitalisation and the burden sharing with the holders of the Bank’s subordinated bonds. At March 2018, the Bank reported a CET1 ratio (phased-in) of 14.4%, down by 41bps QoQ, mainly due to the increase in RWAs for market risk. On a fully loaded basis, including the impact of the IFRS 9 FTA for EUR 1.4 billion, the Bank’s CET1 ratio decreased to 11.7% from 14.2% at YE 2017.

In 2H 2018, the Bank’s capital ratios are expected to be impacted by an add-on on RWAs of approximately EUR 4-5 billion, due to the ongoing ECB revision of the capital treatment of NPEs. Additional negative impact may also arise from the recent increase in Italian sovereign bonds yields.

The Grid Summary Grades for Banca Monte dei Paschi di Siena SpA are as follows: Franchise Strength – Moderate; Earnings – Weak; Risk Profile – Weak; Funding & Liquidity – Weak/Moderate; Capitalisation – Weak.

Notes:
All figures are in Euro 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 documents, SNL financial, the Ministry of Economy and Finance (MEF), the European Commission (EC) and the European Central Bank (ECB). 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: January 18, 2013
Most Recent Rating Update: August 23, 2017

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