Morningstar DBRS Confirms Banca Popolare dell'Alto Adige S.p.A.'s Long-Term Issuer Rating at BBB (low), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings on 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). Morningstar DBRS also confirmed the Bank's Long-Term Deposits credit rating at BBB, which is one notch above the Intrinsic Assessment (IA), reflecting Italy's legal framework with full depositor preference in bank insolvency and resolution proceedings. The trend on all credit ratings is Stable. The Bank's IA is BBB (low) and the Support Assessment is SA3. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings reflects BPAA's relatively small but solid and stable franchise in its home region of Trentino-Alto Adige, Italy; stable funding and liquidity position supported by a resilient and granular deposit base; and adequate capital ratios. The credit ratings also consider that the Bank's profitability has improved overall, thanks to revenue growth and cost control. However, Morningstar DBRS believes that BPAA's profitability has peaked, with net interest income (NII) down in 2024 amid lower rates, and remains somewhat weak compared with its domestic and European peers. While Morningstar DBRS considers BPAA's ongoing effort to reduce its nonperforming exposures (NPEs), asset quality continues to compare less favourably with domestic and international peers. Furthermore, Morningstar DBRS views the current environment to be marked by geopolitical tensions and downside risks to the macroeconomic environment because of U.S. trade policies, which could lead to an increase in defaults. The credit ratings reflect the Bank's high capital ratios, but also its fragmented shareholder base and modest internal capital generation.

BPAA's IA of BBB (low) is at the lower end of the IA range. This reflects that, although profitability improved in the past two years because of higher interest rates, Morningstar DBRS views profitability as having peaked because interest rates have now decreased, lending could reduce, and cost of risk could increase.

CREDIT RATING DRIVERS
Morningstar DBRS would consider an upgrade of the Bank's credit ratings with a longer track record of structural improvement in profitability, including higher revenue diversification, and continued asset quality improvement.

Morningstar DBRS would consider a downgrade of the credit ratings with a significant deterioration in the Bank's risk profile or capitalisation.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Moderate/Weak
With approximately EUR 12 billion in total assets at the end of 2024, BPAA maintained a stable market position in the wealthy autonomous region of Trentino-Alto Adige/Südtirol in the northeastern part of Italy. Trentino-Alto Adige has historically economically outperformed the rest of Italy, benefitting from its strategic location at the border with Austria and Switzerland and its special status, which provides greater autonomy.

Earnings Combined Building Block Assessment: Good/Moderate
BPAA's earnings generally reflect its low revenue diversification and solid efficiency levels. In 2024, profitability improved further with net income standing at EUR 126 million, up from EUR 101 million in 2023, driven by revenue growth and low provision levels that more than offset moderate operating expense growth. As a result, the Bank's return on average equity was 13.0% in 2024, up from 11.3% in 2023. Revenues grew 5.6% in 2024, driven mostly by fees and commissions, which were up 5.4% at EUR 106 million because of favourable dynamics in commercial banking services, including payment services. Morningstar DBRS also notes that other income was significantly higher than in 2023, boosted by sizeable trading profits and gains from the sale of government bonds. However, NII decreased by 3.7% year over year (YOY) to EUR 265 million after peaking in 2023 as interest rates decreased and margins compressed as banks attempt to retain market shares. BPAA further demonstrated its capacity to maintain its cost base, with operating expenses growing by only 1.5% to EUR 216 million. The bank's cost-to-income ratio improved to around 53% in 2024 from 55% in 2023, thanks to lower expenses and higher revenue. BPAA reported low loan loss provisions of EUR 4.0 million in 2024 after releasing EUR 1.0 million in 2023. The cost of risk was six basis points (bps) in 2024 compared with a negative 2 bps in 2023 based on Morningstar DBRS' calculations.

Risk Combined Building Block Assessment: Good/Moderate
In recent years, the Bank has made progress in reducing its NPEs, mostly through a combination of disposals and securitisations, but also organic workouts. BPAA's stock of gross NPEs was down 9.9% YOY to EUR 302 million at the end of 2024, compared with the end of 2023, and its gross nonperforming loans (NPL) ratio improved to 3.9% at the end of 2024 from 4.4% at the end of 2023. The net NPL ratio was 1.7% at the end of 2024, down from 1.9% at the end of 2023. Despite the improvement, Morningstar DBRS considers the Bank's asset quality metrics to be weaker than domestic and international standards. Stage 2 loans represented 11% of total gross customer loans at the end of 2024, in line with the pre-pandemic level. Total NPL coverage was 59.0% at the end of 2024, stable from the end of 2023. At the end of 2024, bad loans (or sofferenze) represented 51.4% of total gross NPLs, fairly stable from 50.8% at the end of 2023. Similarly, unlikely-to-pay (UTP) represented 44.9% of total gross NPLs compared with 45.9% at the end of 2023 and past-due loans represented 3.7% of total gross NPLs compared with 3.3% at the end of 2023). At the end of 2024, the Bank reported its coverage for bad loans at 76.6% (74.4% in 2023), UTP loans at 41.3% (44.1% in 2023), and past-due loans at 27.8% (27.6% in 2023), in line with domestic peers.

Funding and Liquidity Combined Building Block Assessment: Good/Moderate
Morningstar DBRS views BPAA's funding profile as adequate, underpinned by its stable and granular retail deposit franchise in its home market. At the end of 2024, customer deposits were down 1.1% YOY to EUR 8.6 billion, accounting for around 84% of the Bank's direct funding from customers. The proportion of central bank funding reduced to 0% at the end of 2024 from 7% at the end of 2023, following the full repayment of the Bank's remaining exposure to TLTRO III. A key strength supporting the credit ratings is BPAA's solid liquidity position. At the end of 2024, BPAA had around EUR 3.0 billion in unencumbered securities, amply covering outstanding net short-term funding. The Bank also reported liquidity coverage and net stable funding ratios well above the regulatory requirements at 213% and 135% at the end of 2024, respectively.

Capitalisation Combined Building Block Assessment: Moderate
The Bank's capital ratios were reinforced in 2024 through improved internal capital generation. The Bank's CET1 ratio and total capital ratio were 16.2% and 17.6% at the end of 2024, respectively, up from 15.4% and 16.8% at the end of 2023, respectively, despite risk-weighted asset growth on the back of loan growth. These ratios compared with a minimum 2024 overall capital requirement of 9.5% for the CET1 ratio for the first part of 2025, which includes the systemic risk buffer of 0.5% imposed by the Bank of Italy and total capital of 13.7% according to the Supervisory Review and Evaluation Process. The Bank also reported a sound fully loaded CRR/CRD IV leverage ratio of 7.5% at the end of 2024 and complied with its MREL requirements of 12.00% of the total risk exposure amount and 4.25% of leverage ratio exposures.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/453996.

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 Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/453996.

Notes:
All figures are in euros 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. 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/437781 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 these credit ratings include Morningstar, Inc. and company documents. Other sources include Banca Popolare dell'Alto Adige 2024 Annual Reports and Banca Popolare dell'Alto Adige 2024 Non-Financial Statement. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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' trends 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/453995.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Senior Vice President - European Financial Institution Ratings
Rating Committee Chair: Vitaline Yeterian, Senior Vice President, Sector Lead - European Financial Institution Ratings
Initial Rating Date: 18 February 2014
Last Rating Date: 15 May 2024

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