DBRS Upgrades Credito Valtellinese’s Issuer Ratings to BB (high) / R-3, Stable Trend

DBRS Ratings GmbH (DBRS) upgraded the ratings of Credito Valtellinese SpA (Creval or the Bank) including its Long-Term Issuer Rating to BB (high) from BB, and the Short-Term Issuer Rating to R-3 from R-4. The trend on all ratings is now Stable. The Intrinsic Assessment (IA) of the Bank is now BB (high), whilst the Support Assessment remains at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS
The upgrade of the Bank’s Issuer Ratings to BB (high) / R-3 with a Stable Trend, takes into account the significant progress made by the Bank in reducing its large stock of Non-Performing Exposures (NPEs). At year-end 2018, the total gross NPE ratio was 11%, down from 22% at FY17, mainly as a result of disposals and NPE securitisations. Despite the improvement, however, the Bank's asset quality remains weak relative to European peers.

The upgrade also reflects the strengthening of the Bank’s capital ratios following the successful capital raise in March 2018 and the approval from the Bank of Italy to use internal A-IRB credit risk models. At year-end 2018, the Bank reported a fully loaded Common Equity Tier 1 (CET1) ratio of 13.5%, or 18.3% on a phased-in basis. In DBRS’s view, this puts Creval in a stronger position to accelerate its NPE reduction plans.

The current ratings and the Stable Trend also incorporate DBRS’s view that Creval’s profitability remains weak and is likely to only improve gradually. In terms of franchise, the ratings consider Creval’s solid market position in its home province of Sondrio, the progress made with simplification of the corporate structure, as well as the stable retail funding base.

The Bank’s Deposit ratings were upgraded to BBB (low)/R-2 (middle), Stable Trend. The Banks’s Long-Term deposit rating is one notch above the BB (high) IA, reflecting the full depositor preference in bank insolvency and resolution proceedings, introduced in Italy from January 1, 2019. For further information please refer to “DBRS Upgrades Deposit Ratings of Certain Italian Banks”.

RATING DRIVERS
Positive rating implications would require a return to sustained profitability and further improvement in asset quality. Negative implications are less likely given the upgrade, but they could arise should the Bank be unable to improve its profitability, and there was a significant weakening of capital and funding.

RATING RATIONALE
Creval is a small-medium sized retail & commercial Bank, with a meaningful presence in the regions of Lombardy (especially in its home province of Sondrio) and Sicily. In 2018, the Bank continued to streamline its operations by reducing the number of legal entities, closing retail branches and reducing the number of employees. In addition, as part of the strategy to boost revenues, the Bank has strengthened its presence in factoring and salary-loans business, as well as signing a partnership with Credit Agricole for the distribution of life insurance and investment products.

Following the EUR 700 million recapitalisation completed in March 2018, the Bank’s shareholder meeting appointed a new board of directors in October 2018, and a new CEO was appointed in February 2019. The management is now expected to release a new business plan in 2Q19. This, in DBRS’s view, will likely include additional measures to improve profitability and asset quality.

Creval’s profitability levels remained weak in 2018 reflecting a combination of lacklustre revenues, modest efficiency levels and high cost of credit. The Bank posted a net profit of EUR 32 million, compared to a net loss of EUR 332 million in 2017. The results, however, benefitted from a positive tax income equal to EUR 134 million which included several one-off items.

In 2018, Creval made significant progress in reducing its large stock of NPEs. The gross stock decreased to EUR 2 billion from EUR 4 billion at FY17, supported by a combination of securitisations and direct sales. The gross NPE ratio dropped to 11% from 21.7% at FY17, while the net NPE ratio was 5.2%, down from 13.2%. Despite the improvement, however, the Bank's asset quality remains weak relative to European peers.

In 2018, NPE coverage levels strengthened across all NPE categories. Total NPE coverage, with the IFRS 9 first-time adoption (FTA), was 55.9%, up from 45.3% in 2017. The higher provisioning levels will likely support further NPE disposals. At FY18, 69% of the Bank’s total net NPE stock was composed of Unlikely-to-Pay Loans (UTPs).

Creval’s funding profile is underpinned by a stable retail deposit base. Access to the wholesale market has become increasingly challenging with the rise of the Italian Sovereign bond yields. In DBRS’s view, the Bank’s liquidity position is acceptable with a stock of unencumbered assets of EUR 2.9 billion. For the period 2019-2020, the Bank has total bond maturities of EUR 836 million, and ECB TLTRO II funds of EUR 2.5 billion maturing by March 2021.

Creval’s capital position strengthened in 2018 with the fully-loaded CET1 ratio, including the IFRS 9 FTA, at 13.5%, (or 18.3% phased-in), up from 10.4% at FY17. At these levels, in DBRS’s view, Creval is in a stronger position to accelerate its plans for further NPE reduction. The improvement in the Bank’s capital ratios was supported by several actions, including a rights issue of EUR 700 million in March 2018, the approval of the A-IRB models in September 2018, as well as the bancassurance agreements.

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.

Notes:
All figures are in EUR 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 SNL Financial and company documents. 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 GmbH 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: February 7, 2013
Last Rating Date: March 28, 2018

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