OREANDA-NEWS. Fitch Affirms Credito Emilano at 'BBB+'; Outlook Stable Fitch Ratings has affirmed Credito Emiliano's (Credem) Long-Term Issuer Default Rating (IDR) at 'BBB+' and Viability Rating at 'bbb+'. The Outlook is Stable. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS and VR

Credem's IDRs are driven by the bank's standalone profile, as captured by the Viability Rating (VR). The VR reflects the bank's moderately healthy asset quality, sound capitalisation and resilient profitability, due to a business model that is more diverse than that of many other Italian medium-sized banks, and a strategy of targeting customers of stronger credit quality.

Profitability has remained resilient because of diversified revenue sources. Net interest income has been under pressure from higher competition for sound-quality retail and SME lending, which is only partly offset by decreasing funding costs. However, lower interest revenue has been partly compensated by stable fees and commissions generated from Credem's wealth management and insurance businesses. A turbulent market in 1Q16 had a negative impact on such fees, although this was reduced by the bank's modest dependence on performance fees. Although 2015 results benefited from a large one-off gain from the sale of Italian government bonds we believe that profitability will be maintained in 2016 due to increasing business volumes.

Costs are high at Credem, both as a proportion of revenues and of assets, and have been affected by continued investments in IT systems and controls and compliance structures. On the other hand, loan impairment charges have not been as material at Credem as at other banks.

Asset quality is significantly better than that of other rated Italian banks, with low levels of concentrations and impaired loans (Credem reported a gross impaired loans-to-gross loans equal to 6.2% at end-1Q16, up slightly from end-2015 because of deleveraging over the period). The bank's focus on better-quality domestic SMEs and retail borrowers has allowed it to avoid the asset quality deterioration seen at the major Italian peers.

Credem's resilient profitability has allowed the bank to generate capital internally despite the payment of dividends to its 77% owner, Credem Holding. At end-1Q16, Fitch Core Capital was sound at 14.8% (the fully-loaded CET1 ratio at the same date was slightly lower at 13.8%), well above the bank's projected capital plans. The bank at end-1Q16 maintained a buffer of over 680bp over the group's CET1 regulatory SREP requirement. The regulator the ECB supervises the Credem group on a consolidated basis at the level of Credem Holding. The consolidated Credem Holding CET1 ratio is slightly lower than at Credem because of the deduction of minority interests.

The bank is also less exposed to collateral valuations than its Italian peers, due to a low level of unreserved impaired loans to FCC (36% at end-1Q16). It should be noted that Credem is the only bank among rated medium-sized banks in Italy to report risk-weighted assets using an advanced internal model, which results in a lower weighting of assets than generally seen, boosting its regulatory ratios. Regulatory leverage (5% at end-2015) is, in our view, moderate but higher than at most medium-sized Italian banks.

SUPPORT RATING AND SUPPORT RATING FLOOR

The bank's Support Rating and Support Rating Floor reflect our view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that a bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Credem's subordinated callable Tier 2 debt are rated one notch below the bank's VR. The notes are notched down once for loss severity to reflect below-average recovery prospects. No notching is applied for incremental non-performance risk because write-down of the notes will only occur once the point of non-viability is reached and there is no coupon flexibility prior to non-viability.

RATING SENSITIVITIES

IDRS, VR AND SENIOR DEBT

Credem's VR and IDRs are primarily sensitive to a material deterioration in asset quality, which could be the result of weaker underwriting standards, which we do not expect. Ratings could also be downgraded if its capitalisation deteriorates as a result of strong loan growth or if the bank increases its risk appetite.

An upgrade is unlikely as Fitch would not rate Credem, a small domestic bank, above the Italian sovereign rating (BBB+/Stable). Therefore, the bank's rating is also sensitive to a downgrade of Italy's rating.

SUPPORT RATING AND SUPPORT RATING FLOOR

An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support Credem. While not impossible, in Fitch's view this is highly unlikely.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt are sensitive to a change in the bank's VR. The rating is also sensitive to a change in notching if Fitch revises its assessment of loss severity or incremental non-performance risk.

The rating actions are as follows:

Credito Emiliano

Long-Term IDR: affirmed at 'BBB+'; Outlook Stable

Short-Term IDR: affirmed at 'F2'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

Senior unsecured EMTN programme: affirmed at 'BBB+'

Subordinated note, XS1199020295: affirmed at 'BBB'