Morningstar DBRS Revises Trend on BPER Banca to Positive, Confirms Long-Term Issuer Rating at BBB

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings of BPER Banca S.p.A. (BPER or the Bank), including the Long-Term Issuer Rating at BBB and the Short-Term Issuer Rating at R-2 (high). The trend on the Long-Term Issuer Rating was changed to Positive from Stable. The Bank's Long-Term Deposits rating was confirmed at BBB (high), one notch above the Intrinsic Assessment (IA), reflecting the legal framework in place in Italy, which has full depositor preference in bank insolvency and resolution proceedings. The trends on the Long-Term and Short-Term Deposit ratings are Stable, as these are at the same level as the ratings of the Republic of Italy. Morningstar DBRS has also maintained the Bank's IA at BBB and its Support Assessment at SA3. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The change of the trend to Positive from Stable reflects the improvement in the Bank's ability to generate recurring earnings driven mainly by higher interest margins, improved operating efficiency, and lower credit costs. Morningstar DBRS considers that the expected interest rate cuts, coupled with higher funding costs and potentially higher credit costs because of new asset quality risks, might absorb part of the recent improvement in profitability levels. However, in Morningstar DBRS' view, BPER's core earnings power will likely remain higher than its historical average, helped by its diversified revenue mix as well as its commitment to cost control, which will help the Bank do well in the expected lower interest-rate environment.

The Positive trend also takes into account the further improvement in BPER's risk profile over the last 12 months despite some early, albeit limited, signs of asset quality deterioration in Q1 2024. At this stage, Morningstar DBRS does not anticipate a substantial increase in the current low default rates as a result of higher interest rates and a slowdown in economic activity. Therefore, BPER should be able to maintain its overall good asset quality metrics in view of further de-risking, sound coverage levels, and some support to credit expansion driven by the expected reduction in interest rates.

The confirmation of the credit ratings reflects the Bank's well established and more diversified franchise in Italy resulting from recent integrations as well as its adequate capital, and funding and liquidity position, which leverages its ample and granular customer deposit base and enhanced access to capital markets.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require BPER to maintain its improved underlying profitability and asset quality on a sustained basis while preserving adequate capital buffers. Further progress in improving operating efficiency could also contribute to an upgrade.

Given the Positive trend, a downgrade of the credit ratings is unlikely at this time. However, the trend could be revised to Stable in the event of a significant deterioration in the Bank's asset quality and/or a sustained weakening of its underlying profitability.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Good/Moderate

BPER is the fourth-largest banking group in Italy with around EUR 140 billion in total assets at end-March 2024. The Bank mainly provides traditional banking services to individuals and corporate entities, mostly small and medium-size enterprises, as well as corporate and investment banking, private banking, asset and wealth management, insurance, leasing, and factoring. BPER recently completed several inorganic transactions as part of its strategy to strengthen its market position and regulatory capital, de-risk its balance sheet, streamline its structure, and benefit from synergies. The Bank has material market shares in its home region of Emilia Romagna as well as in Southern Italy and Sardinia, and its market position has improved throughout Italy, especially in Lombardy, Liguria, and Tuscany, on the back of the integrations of the Intesa Sanpaolo-UBI Banca branch network and Banca Carige. BPER's main shareholder, Unipol Group, holds around 20% of its share capital and plays a critical role in its bancassurance business model in addition to being a supportive shareholder.

Earnings Combined Building Block (BB) Assessment: Good/Moderate

BPER's earnings power has improved, mainly reflecting higher interest margins, improved operating efficiency, and lower credit costs. The Bank's profitability has recently been affected by several nonrecurring items, mainly associated with strategic transactions, restructuring, and de-risking. In Morningstar DBRS' view, BPER's core earnings power will generally remain higher than its historical average in the near future, however, the expected interest rate cuts, coupled with higher funding costs and potentially higher loan loss provisions (LLPs) because of new asset quality risks, will likely offset some of the recent improvement. The Bank's efforts in respect of cost control will help offset some pressures related to the higher, albeit reducing, inflation rate and investments for digitalization, while its diversified revenue mix should help ensure revenue stability in the expected lower interest-rate environment. BPER reported a net attributable profit of around EUR 457 million in Q1 2024, up 57% Year-On-Year (YOY) or up 6% YOY after excluding EUR 150 million of capital gain from the partial sale of the Bank's non-performing exposure (NPE) internal management platform, mainly thanks to higher core revenues (net interest income or NII, and net fees) and lower LLPs, partly offset by increased operating expenses. Core revenues were up 10% YOY in Q1 2024, mainly supported by higher interest rates that have contributed to widen commercial spreads as funding costs have increased to a lesser extent than asset yields. Net fees increased on a yearly basis, supported by a recovery in asset management, partly offset by lower fees from bancassurance and traditional banking services. Operating efficiency improved with a cost-to-income ratio of 56% in Q1 2024 (65.8% if calculated on core revenues), down from 58% in Q1 2023. BPER's annualised cost of risk was 43 basis points (bps) in Q1 2024, down from 63 bps in Q1 2023, and down slightly from 48 bps in FY 2023.

Risk Combined Building Block (BB) Assessment: Good/Moderate

BPER's stock of gross NPEs has reduced further, driven by disposals as well as organic actions. The Bank's gross and net NPE ratios fell to 2.6% and 1.2%, respectively, at end-March 2024 from 3.3% and 1.3%, respectively, one year earlier. While Morningstar DBRS notes a slight deterioration in the gross NPE ratio compared with 2.4% at end-2023, the net NPE ratio has remained unchanged and BPER's current asset quality metrics continue to compare favourably with European peers despite some loan contraction. At end-March 2024, net customer loans were down 2% YOY and down 1% Quarter-On-Quarter (QOQ) mainly because of high repayments and sluggish new loan volumes, consistent with the higher interest rates and slowdown in economic activity. Stage 2 loans (i.e., loans where credit risk has increased since origination) represented 10% of net loans at end-March 2024, down from 11% one year earlier. The potential risk to BPER from the former Banca Carige's legal risks remains limited in Morningstar DBRS' view.

Debt securities made up 92% of BPER's EUR 26.5 billion financial asset portfolio at end-March 2024, and around 73% of that total was classified at amortised cost (AC). Due to the increase in interest rates, the fair value of the fixed-income securities at AC was lower than its carrying value, which implies a potential capital depletion of around 180 bps, lower than the 211 bps seen one year earlier, should BPER sell the portfolio. However, Morningstar DBRS does not anticipate BPER will be forced to sell the portfolio given its sound liquidity position.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate

Morningstar DBRS sees BPER's funding profile as solid, with its retail customer base accounting for 70% of total direct funding at end-March 2024. Despite some recent deposit outflows because of corporate loan repayments not being rolled over, and driven by higher interest rates and lower investment needs as well as a reduction in available liquidity for households that have been searching for products with higher remuneration, the Bank's net loan-to-deposit ratio, as calculated by Morningstar DBRS, was around 91% at end-March 2024, up slightly from 90% one year earlier. BPER has fully repaid its exposure to the ECB, and continues to make regular use of the repo market. The Bank's access to capital markets has increased recently, with around EUR 12 billion of debt securities outstanding at end-March 2024, up 67% YOY and equivalent to 10% of total funding, consistent with its plan to replace TLTRO III funds and fulfil MREL regulatory requirements. Notwithstanding the full repayment of TLTRO III sources, BPER maintains a sound liquidity profile with around EUR 11 billion of deposits with the ECB at end-March 2024 as well as a pool of EUR 20 billion of unencumbered ECB eligible assets, a Liquidity Coverage Ratio (LCR) of 162% and a Net Stable Funding Ratio (NSFR) of 133%.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate

In Morningstar DBRS' view, BPER maintains an adequate capital position despite the risk-weighted asset (RWA) inflation from recent acquisitions as its earnings have improved recently, ensuring sustained generation of internal capital. As of end-March 2024, the Bank reported a fully loaded CET1 ratio of 14.9% and a fully loaded Total Capital ratio of 19.5%, up from 12% and 15.7% respectively at end-2022, mostly because of the conversion of Banca Carige's on-balance deferred tax assets (DTAs) into tax credits, retained earnings, and the issuance of EUR 500 million of Additional Tier 1 (AT1) instruments in January 2024. The current capital ratios provide solid buffers for both CET1 and Total Capital ratios of around 650 bps over the supervisory requirements. The 2024 requirements incorporate a Pillar 2 Requirement (P2R) of 2.25%, down from the previous 2.6%, however, this was partly offset by a 0.125% add-on because of BPER's classification as an Other Systemically Important Institution (O-SII). Morningstar DBRS expects the minimum requirements to increase because of the introduction of a 1% Systemic Risk Buffer (SyRB) for Italian banks to be gradually met by end-June 2025. In May 2024, BPER paid around EUR 425 million of dividends, equivalent to 28% of the net income reported in 2023 (or 25% excluding one-off items), up from a pay-out ratio of 12% (or 34%) one year earlier, and consistent with its strategy to increase shareholder remuneration up to around 50%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/434591/.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social and Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881/global-methodology-for-rating-banks-and-banking-organisations. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar, Inc. and company documents, BPER Q1 2024 Results Press Release, BPER Q1 2024 Results Presentation, BPER Q1 2024 Report, BPER 2019-2023 Annual Reports, BPER 2023-Q1 2024 Pillar 3 Reports, BPER 2023 Non-Financial Statement, and BPER 2023 TCFD Report. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/434590/.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Andrea Costanzo, Vice President - European Financial Institution Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director - Global Financial Institution Ratings
Initial Rating Date: July 28, 2022
Last Rating Date: July 18, 2023

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