DBRS Confirms Intesa Sanpaolo’s Issuer Rating at BBB (high); Stable Trend

DBRS Ratings GmbH (DBRS) confirmed the ratings of Intesa Sanpaolo SpA (ISP or the Bank), including the Long-Term Issuer Rating of BBB (high) and the Short-Term Issuer Rating of R-1 (low). The trend on all ratings remains Stable. Concurrently, DBRS maintained the Bank’s Intrinsic Assessment at BBB (high) and the 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 ISP’s ratings takes into account the Bank’s leading retail and commercial banking franchise in Italy, its diversified business model, resilient earnings, solid capital position and lower stock of non-performing loans (NPLs). Nevertheless, the ratings continue to consider the Bank’s relatively high NPL stock compared its international peers, as well as the challenges posed by high sovereign bond spreads and modest economic growth in Italy. Given ISP’s domestic concentration and large exposure to Italian sovereign bonds, DBRS considers that the Bank is unlikely to be rated higher than the Italian sovereign. DBRS currently rates the Republic of Italy at BBB (high)/R-1 (low) with a Stable trend.

RATING DRIVERS

The Bank’s ratings are at the same level as the sovereign rating, and a one notch upgrade of the Italian sovereign would likely result in an upgrade of the Bank’s Issuer Ratings, assuming the Bank maintains an adequate capital position. Negative rating implications could result from a downgrade of Italy’s sovereign rating or a material deterioration in the Bank’s asset quality and capital position.

RATING RATIONALE
Intesa Sanpaolo has a leading market position in the Italian retail and commercial banking markets with solid reputation and a well-diversified business model. Over recent years, the Bank has been successful in expanding its fee-driven activities such as asset management, private banking and bancassurance. The contribution from fee and commission income has gradually increased to around 43% of the Bank’s total income in 1Q19 from 38% in 2013.

The Bank’s earnings have proven to be resilient, supported by revenue diversification and good efficiency levels, whilst the cost of risk has decreased on the back of improvements in asset quality. For FY18, ISP reported a net profit of EUR 4 billion of which EUR 3.4 billion was paid out as dividends corresponding to a high dividend pay-out ratio of 85%, but underpinned by the Bank’s adequate capital position.

For 1Q19, the Bank reported consolidated net income of EUR 1.05 billion, down 16% YoY. However, excluding some one-off contributions from asset disposals, the Bank’s net income was up 4.4% YoY. The underlying results were mainly supported by lower loan loss provisions with an annualised cost of risk at 37bps, down from 61 bps in 2018 and 48 bps in 1Q18, as well as lower operating expenses. In terms of core revenues, slower volumes in the capital market business and challenging market conditions contributed to lower fee income in the quarter, while net interest income was up slightly QoQ driven by lower cost of funding and loan re-pricing.

Supported by the disposal of EUR 10.8 billion of bad loans to Intrum, and lower inflows of new NPLs, ISP’s stock of gross NPLs decreased to EUR 35.5 billion at 1Q19, from EUR 50.6 billion at 1Q18 and EUR 36.5 billion at FY18. The gross NPL ratio stood at 8.5% at end-1Q19, down from 11.7% at 1Q18, a level which is still high compared to the Bank’s international peers. On a net basis, NPLs decreased to EUR 16.3 billion with a total NPL coverage ratio of 54.1%. According to the Bank’s business plan, ISP targets a gross NPL ratio of 6% (2.9%, net of provisions) in 2021. Taking into account the Bank’s financial strengths and track-record in NPL reduction, DBRS considers that ISP is well positioned to achieve these targets ahead of plan.

ISP’s robust funding profile is underpinned by its large retail deposit base. In addition, the Bank maintains good access to the wholesale funding markets. Nonetheless, the risk premium required by investors and refinancing costs have increased due to rising Sovereign bond spreads. With EUR 99 billion in total unencumbered assets at 1Q19, the Bank has a sizable liquidity buffer for future bond maturities. The Bank’s LCR and NSFR indicators remained well above the minimum requirements.

In DBRS’ view, Intesa SanPaolo maintains an adequate capital position and solid buffers over the minimum ECB SREP requirements which include a 8.96% CET1 phased-in ratio (or 9.33% fully loaded). At end 1Q19, the Bank reported a phased-in CET1 ratio of 13.1% (13.5% fully phased) and total capital ratio of 17.2%, which compare favourably with its International peers.

The Grids Summary Grades for Intesa Sanpaolo SpA are as follows: Franchise – Strong; Earnings – Good; Risk Profile – Moderate; Funding & Liquidity – Strong / Good; Capitalisation – Good.

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) and the DBRS Criteria: Guarantees and Other Forms of Support (January 2019). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company disclosures 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Nicola De Caro, Senior Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of EU FIG – Global FIG
Initial Rating Date: September 13, 2013
Most Recent Rating Update: July 17, 2018

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Amtsgericht Frankfurt am Main, HRB 110259

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