DBRS Confirms UBI Banca at BBB/R-2 (high); Stable Trend

DBRS Ratings Limited (DBRS) confirmed the ratings of Unione di Banche Italiane SpA (UBI Banca, UBI or the Bank), including the Long-Term Issuer Rating of BBB and the Short-Term Issuer Rating of R-2 (high). The trend on all ratings remains Stable. DBRS has also maintained the Bank’s Intrinsic Assessment at BBB 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 the BBB Long-Term Issuer Rating reflects UBI’s progress in streamlining its organizational structure and in further reducing the stock of non-performing exposures (NPEs). The ratings, however, continue to incorporate the Bank’s still high stock of NPEs which, albeit reducing, remains higher than European peers. Challenges to further improve profitability and asset quality have increased due to the difficult economic environment in Italy and the recent increased market volatility. However, the Stable trend reflects DBRS’s expectation that the Bank’s capital and liquidity ratios and buffers remain acceptable and that the Bank will continue to improve its asset quality profile.

RATING DRIVERS

Positive rating pressure is unlikely in the current operating environment but it would require further progress in asset quality and profitability. Negative rating pressure could arise from a material weakening of the Bank’s capital and funding position or should the Bank be unable to continue improving its profitability and asset quality.

RATING RATIONALE

UBI is the 5th largest Italian Bank with EUR 125 billion in total assets at end-September 2018. The bank’s franchise is underpinned by its stable market shares in the wealthy regions of Lombardy and Piedmont, as well as a solid deposit base in central and southern parts of Italy.

In recent years, UBI has taken steps to improve efficiency, strengthen processes and reduce operational complexity. Major changes included the transformation from a cooperative bank into a joint-stock company, and the implementation of a “Single Bank Project” which led to the merger of several banking subsidiaries into the parent company. As part of the Group’s streamlined structure, in October 2018, UBI’s Shareholders’ Meeting approved the adoption of a single tier governance system which replaces a two-tier board structure in 2019. In addition, the Bank continues to downsize its branch network and workforce.

The Bank’s profitability has been modest and volatile, mainly as a result of the high asset quality costs and margin pressure, as well as one-offs from corporate restructuring and acquisitions. For the 9M 2018, UBI reported a net profit of EUR 210 million, down from EUR 702 million a year earlier which was impacted by the positive contribution of EUR 616 million in bad-will from the acquisition of three regional banks. The Bank’s core net interest income (NII) remains generally modest reflecting the low interest rate environment, modest lending volumes and high market competition. DBRS notes that the Bank’s revenue diversification has improved with higher fees and commission income from wealth management and insurance products. The Bank’s efficiency levels are gradually benefitting from the Group’s simplification, while lower default rates contributed to a lower cost of credit in 2018.

UBI has made progress in reducing NPEs and at end-September 2018 total gross NPEs were EUR 10.5 billion, down 15% from January 1, 2018. This was mainly driven by a EUR 2.75 billion securitisation of bad loans, with a total gross value of EUR 1.5 billion, using the government guarantee scheme (GACS). The improvement in asset quality was also supported by higher recoveries and lower NPE inflows. Nonetheless, the total gross NPE ratio (11.1% at end-September 2018) remains higher than European peers.

The Bank’s performance and balance sheet are sensitive to rising sovereign yields and market volatility. This in part reflects the Bank’s exposure to the Italian sovereign debt via its security portfolio. As of end-September 2018, the Bank had EUR 8.1 billion in Italian government bonds (excluding insurance), representing 116% of the CET1 capital. The widening of the sovereign spreads, from May 2018, contributed to a negative impact on the fair value reserves of the total portfolio for approximately 56 bps in 2Q18 and 12 bps in 3Q18.

UBI’s funding profile is underpinned by its large and stable retail deposit base, as well as adequate liquidity buffers, although ECB funding of EUR 12.5 billion is significant. Since the rise of the Italian sovereign bond yields, funding conditions on the wholesale market have become more difficult but the Bank has used other funding channels including the retail segment, private placements and repos.

The Bank maintains a moderate capital position. As of end-September 2018, the Bank’s reported CET1 ratio and Total Capital ratio (fully loaded) were 11.4% and 13.9%, which are at the low end of the European peer group. Despite the impact from the sovereign spreads, the Banks’ capital ratios were broadly unchanged supported by the reduction in RWAs.

UBI was subject to the 2018 EU-wide stress test from the European Banking Authority (EBA). In the adverse scenario, UBI would show a capital resiliency in line with the European average with a capital depletion of 397 bps (or 374 bps restated for the IFRS 9). According to the results, the Bank’s CET1%, fully-loaded, would fall to 7.46% in 2020 from 11.43% (or restated 11.20%) at YE2017 mainly as a result of higher impairments on credit risk.

The Grid Summary Grades for Unione di Banche Italiane SpA are as follows: Franchise Strength – Good; Earnings – Moderate; Risk Profile – Moderate; Funding & Liquidity – Good; Capitalisation – Moderate.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports, European Banking Authority (EBA) 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 and US regulations only.

Lead Analyst: Nicola De Caro – Senior Vice President – Global FIG
Rating Committee Chair: Ross Abercromby - Managing Director – Global FIG
Initial Rating Date: November 25, 2015
Most Recent Rating Update: November 27, 2017

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