DBRS Confirms BPAA’s Issuer Ratings at BBB (low)/R-2(middle), Stable Trend

DBRS Ratings GmbH (DBRS) confirmed the ratings of Banca Popolare dell’Alto Adige – Volksbank SpA (BPAA or the Bank), including the Long-Term Issuer Rating of BBB (low) and the Short-Term Issuer Rating of R-2 (middle). The Trend on all ratings remained Stable. At the same time, BPAA’s Intrinsic Assessment (IA) remains at BBB (low) and Support Assessment remains SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the Issuer Ratings at BBB (low) / R-2 (middle) with a Stable Trend takes into account the Bank’s solid market position in the wealthy region of Trentino Alto Adige, its stable funding position, and the progress achieved in reducing its stock of Non-Performing Loans (NPLs). The ratings also take into consideration the Bank’s modest profitability levels, the still high stock of NPLs as well as modest coverage levels.

RATING DRIVERS

Positive rating pressure to the Bank’s Long-Term Ratings would require a further significant reduction of NPLs, sustained improvements in profitability and further improvement in capital. Negative rating pressure could arise from a reversal in asset quality improvements, or from a significant weakening of the Bank’s capital and funding position.

RATING RATIONALE

Banca Popolare dell’Alto Adige SpA is a small retail and commercial bank with EUR 10 billion in total assets. The Bank has a stable market position across the wealthy province of Bolzano, in the region of Trentino Alto Adige / Südtirol, as well as a growing presence in the neighbouring region of Veneto.

BPAA’s franchise in Veneto expanded with the acquisition of Banca Popolare di Marostica in 2015. Veneto is amongst Italy’s wealthiest and industrialised areas, with a significant presence of corporate and SMEs underpinning the regional economy. While presenting opportunities, the region of Veneto is also a challenging and competitive market. According to the Bank’s new business plan for 2019-21, BPAA aims at strengthening its market shares in the regions of Trentino and Veneto with selective lending growth, increased focus on private banking and corporate & SME advisory as well growing digital banking.

In FY18, BPAA reported a net profit of EUR 34 million, up from EUR 24 million in 2017, on the back of higher net interest income and lower provisioning levels, partially associated with the introduction of the new IFRS9 accounting standard. The Return on Equity (ROE) was 4.2% in 2018 up from 2.8% at in 2017. Fees and commissions remained broadly stable at EUR 89 million, whilst efficiency levels remained modest with the cost to income ratio (as calculated by DBRS) at 68.4%, up slightly from 67.1% for FY17. Operating expenses increased by 4% mainly due to IT costs and charges for consulting and advisory related activities.

In 2018, the Bank continued to make progress in reducing its high stock of gross non-performing loans while growing its performing loan book by 5.6% YoY to EUR 6.8 billion. At FY18, BPAA’s stock of gross NPLs decreased by 31% YoY to EUR 663 million, supported by disposals of around EUR 188 million. The Bank’s gross NPL ratio was 8.7%, down from 12.9% at end-2017, while the net NPL ratio decreased to 5.1% in 2018 from 7.8%. The Bank’s NPL ratios, which are now in line with those prior to the acquisition of BPM, are expected to decrease further towards a level close to or below 6% by 2021, according to the Bank’s business plan.

BPAA’s NPL coverage levels remained below the average of the peer group. Despite the first time adoption (FTA) of IFRS9, the Bank’s total coverage only increased by 50 bps to 44.0% from 43.5% a year earlier, due to the impact from the sale of highly provisioned NPLs.

The Bank is largely funded by deposits from retail and corporate clients. Total deposits increased by 6% to EUR 6 billion in 2018, supported by an increase in sights deposits, whilst the overall bonds outstanding decreased to EUR 698 million from EUR 955 million in 2017. In addition, the Bank has a significant portion of ECB funding. At FY18, the Bank had EUR 1 billion in TLTRO 2 funds, of which EUR 700 million will mature in June 2020. In DBRS’s view, the Bank has a sizable stock of eligible liquid assets.

BPAA’s capital ratios have weakened in 2018 remaining at the lower-end of the peer group. The Bank’s phased-in CET1 ratio decreased to 11.2% from 11.9% at FY17, mainly due to higher RWAs for credit risk. On a fully loaded basis, however, the Bank’s CET 1 decreased to 10.4% from 11.8%, also taking into account the impact from IFRS9. The total capital ratio, including the issuance of EUR 25 million of Tier 2 bonds in October 2018, was 13.3%, down from 13.6% in 2017.

The Grid Summary Grades for Banca Popolare dell’Alto Adige SpA are as follows: Franchise Strength – Moderate; Earnings – Moderate/Weak; Risk Profile – Moderate; Funding & Liquidity – Good/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: Elisabeth Rudman, Managing Director, Head of EU FIG - Global FIG
Initial Rating Date: February 18, 2014
Last Rating Date: December 14, 2018

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