DBRS Confirms Iccrea’s Long-Term Issuer Rating at BBB (low); Trend Revised to Stable

DBRS Ratings GmbH (DBRS) confirmed Iccrea Banca SpA’s (Iccrea or the Bank) Long-Term Issuer Rating at BBB (low) and Short-Term Issuer Rating at R-2 (middle). The trend on all ratings was changed to Stable from Negative. The Group’s Intrinsic Assessment (IA) was confirmed at BBB (low) whereas the Support Assessment remains SA3. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings and the revision of the Trend from Negative to Stable take into account the recent developments around Iccrea Banca SpA in the context of the newly created banking group, Gruppo Bancario Cooperativo Iccrea (or the Group). In particular, DBRS considers Iccrea Banca’s role as the parent company for a new single banking group, comprising 140 Italian cooperative banks (BCCs or members), and the support from the members with a capital increase of EUR 250 million in April 2019, as positive for Iccrea’s creditworthiness.

At the same time, the ratings continue to reflect the Bank’s modest profitability and efficiency levels, as well as its stock of NPLs, which remains high despite some recent improvements. With the creation of the new banking group, DBRS expects Iccrea and the Group to increase their efforts to reduce NPLs.

The figures used in this press release are the last consolidated data for Iccrea Banca SpA prior to the creation of the new banking group, Gruppo Bancario Cooperativo Iccrea.

RATING DRIVERS
Positive rating pressure would require a sustained improvement in profitability and asset quality. Iccrea and the Group’s members will also need to demonstrate their cohesiveness, as well as make further progress on integration.

Negative rating pressure could occur should the Bank face challenges in reducing its stock of NPLs, or there is a deterioration in profitability. A significant deterioration in capital could also contribute to negative rating implications.

RATING RATIONALE
In March 2019, following regulatory approvals, Iccrea Banca became the parent company of Gruppo Bancario Cooperativo Iccrea, the largest cooperative banking group in Italy, comprising 140 cooperative banks with around EUR 150 billion in total assets. The Group has a strong domestic footprint with over 2,600 branches, 22,500 employees and 4.2 million clients.

Iccrea Banca SpA will continue to play a key role as the provider of funding and treasury services for the BCCs, including access to the European Central Bank (ECB) funds, and is the recipient of their excess liquidity. The Bank also operates the payment system and supports BCCs’ customers with corporate finance, leasing, factoring as well as bancassurance products and services.

In addition, as part of the creation of the new single banking group, Iccrea Banca has assumed control over the Group members. Through a cohesion agreement, the functions of governance, control, risk management and strategic planning have been transferred to Iccrea Banca. The BCCs keep their banking licenses and retain a level of operating autonomy that is proportionate to their level of risk, based on an early warning system.

In DBRS’s view, the cohesion agreement creates a framework for increased transparency and better controls within the Group. At the same time, the members are linked through a guarantee scheme which underpins the Group’s financial stability. The creation of the Group is also expected to enable the realization of cost and revenue synergies. However, in the short to medium term, the integration challenges linked to its complex structure will likely require significant investments in terms of organization and coordination.

As part of the Group’s reorganisation, the BCCs agreed to strengthen Iccrea Banca’s capital position with a capital increase of EUR 250 million in April 2019. At end-2018, the Bank reported a phased-in Common Equity Tier 1 (CET1) ratio of 11.86% and a total capital ratio of 13.05%. Including the capital increase, the pro-forma ratios at YE 2018, were reported at 13.7% for CET1 and 14.9% for total capital.

Generally, the earnings capacity for Iccrea remains modest reflecting limited revenues, modest efficiency levels, as well as a high cost of risk. In 2018, the Bank reported consolidated net income of EUR 6 million, down from EUR 29 million in 2017. This was mainly due to a one-off loss on the sale of a portfolio of Italian government bonds classified as HTCS (Held to Collect and Sale), as well as higher expenses incurred in the creation of the new cooperative banking group.

Iccrea Banca’s risk profile continues to be impacted by a large stock of NPLs. At end-2018, the Bank reported gross NPLs of EUR 2.1 billion, slightly down from EUR 2.5 billion in 2017, corresponding to 18.2% of total loans (or 15.6% including the exposure to Cassa di Compensazione e Garanzia). In 2018, Iccrea, together with other BCC members, participated in two large NPL securitisations using the GACS (Garanzia Cartolarizzazione Sofferenze) scheme.

The Bank also has significant exposure to Italian sovereign bonds. This exposure partly reflects activities with the cooperative banks, to which Iccrea provides collateralised lending in exchange for securities eligible for refinancing operations with the ECB or other institutional counterparties. Given the high volatility and rising sovereign yields in 2H18, the Bank changed its investment strategy by divesting its portfolio of sovereign bonds classified as HTCS (Held to Collect and Sale). The proceeds were re-invested in a portfolio of sovereign bonds classified as HTC (Held to Collect).

In 2018, the Bank maintained a stable funding position, underpinned by its role as a central institution for the cooperative banks. The Bank’s funds mainly comprise ECB TLTRO funds and repos with Cassa di Compensazione e Garanzia, and deposits from BCCs, which have large retail deposit bases and place their excess funds with Iccrea. At end-2018, Iccrea Banca’s liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) were well above the minimum requirements.

The Grid Summary Grades for Iccrea Banca SpA are as follows: Franchise Strength – Good; Earnings – Moderate/Weak; Risk Profile – Moderate / Weak; 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 (June 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 Documents and S&P Global Market Intelligence. 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, Head of EU FIG - Global FIG
Initial Rating Date: July 26, 2018
Last Rating Date: December 14, 2018

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