OREANDA-NEWS. Fitch Ratings has today affirmed Banca Monte dei Paschi di Siena's (MPS) Long-term Issuer Default Rating (IDR) at 'B-', its Short-term IDR at 'B', the Viability Rating (VR) at 'b-', the Support Rating (SR) at '5' and the Support Rating Floor (SRF) at 'No Floor'. The Outlook on the Long-term IDR is Stable. A full list of rating actions can be found at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
MPS's IDRs, VR and senior debt ratings reflect the bank's very weak asset quality and the pressure this exercises on its capital. The ratings also reflect a liquidity position that was under moderate pressure in the first months of 2016, the bank's stronger capital position, following a EUR3bn capital increase in 2015, improved profitability and management's ability to react to the recent deposit outflows and rebalance the bank's liquidity profile.

MPS's capitalisation strengthened in 2015 thanks to a EUR3bn capital increase - which followed a EUR5bn increase in 2014 - and modest internal capital generation. Following the capital increase, the bank fully reimbursed the remaining EUR1bn of government hybrids received as state aid in 2013. The Common Equity Tier 1 (CET1) ratio improved to 12% at end-2015 from 8.5% at end-2014, and the Fitch core capital (FCC) ratio stood at an adequate 11.6% at end-2015. Despite acceptable risk-weighted capital ratios, capitalisation remains weak because of the very high level of unreserved impaired loans, which accounted for about 250% of FCC at end-2015 (despite materially decreasing from an extremely high 400% at end-2014).

Impaired loans accounted for approximately 34% of gross loans at end-2015, placing significant pressure on profitability and capitalisation. MPS reported an operating profit of around EUR600m in 2015 after four years of heavy losses. MPS sold EUR2bn of impaired loans in two tranches in 2015, in line with the business plan, and aims to dispose of another EUR3.5bn over the next three years.

The improved performance was mostly driven by a sharp reduction in Fitch-calculated loan impairment charges, to EUR2.6bn in 2015 (2014: EUR8.3bn) and lower operating costs of EUR2.7bn (2015: EUR3.5bn) according to Fitch's calculation which includes restructuring implementation expenses. MPS's overall performance will likely remain structurally weak in the medium term, unless management undertakes significant actions to reduce the stock of impaired loans through sales; even then, the bank would still risk having to dispose of these below book value.

MPS suffered moderate deposit outflows in the first months of 2016 following the resolution of four Italian banks under special administration in December 2015; this resulted in some depositors withdrawing money from some of the weaker Italian banks, including MPS. The bank regained part of these deposit outflows through effective commercial efforts and increased its activities with institutional counterparties. While deposits have now stabilised and the liquidity position is acceptable, in Fitch's opinion, MPS's liquidity position has proven itself highly vulnerability to market events.

SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF reflect Fitch's view that senior creditors can no longer expect to receive full extraordinary support from the sovereign in the event that a bank becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for the resolution of banks which requires senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other issued hybrid capital are notched down from the VR, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

The ratings of MPS's Lower Tier 2 and Upper Tier 2 debt reflect a high risk of non-performance. The 'C' ratings of its Tier 1 instruments and preferred securities reflect their non-performance and Fitch's expectation that the securities are unlikely to resume coupon payments in the near future.

SENIOR STATE-GUARANTEED DEBT
The Long-term rating of MPS's state-guaranteed debt is based on Italy's direct, unconditional and irrevocable guarantee for the issues, which covers payments of both principal and interest. Italy's guarantee was issued by the Ministry of Economy and Finance under Law Decree 6 December 2011, n.201, subsequently converted into Law 22 December 2011, n. 214.

The ratings reflect Fitch's expectation that Italy will honour the guarantee provided to the noteholders in a full and timely manner. The state guarantee ranks pari passu with Italy's other unsecured and unguaranteed senior obligations. As a result, the notes' Long-term ratings are in line with Italy's 'BBB+' Long-term IDR.

RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
MPS's VR, IDR and senior debt ratings would be downgraded if the bank fails to gradually improve its asset quality and reduce the stock of impaired loans. Deposit outflows of a magnitude that placed unmanageable pressure on the group's liquidity position would also trigger a downgrade.

An upgrade of the ratings would require a material improvement in asset quality and evidence of sustainable earnings generation capabilities.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings are primarily sensitive to a change in the VR, but also to a change in Fitch's view of non-performance or loss severity risk relative to the bank's viability.

SENIOR STATE-GUARANTEED DEBT
The notes' Long-term ratings are sensitive to changes in Italy's Long-term IDR. Any downgrade or upgrade of Italy's Long-term IDR would be reflected in the notes' Long-term ratings.

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

The rating actions are as follows:

Long-term IDR: affirmed at 'B-'; Outlook Stable
Short-term IDR: affirmed at 'B'
VR: affirmed at 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor''
Debt issuance programme (senior debt): affirmed at 'B-', 'RR4'
Senior unsecured debt: affirmed at 'B-', 'RR4'
Lower Tier 2 subordinated debt: affirmed at 'CCC', 'RR5'
Upper Tier 2 subordinated debt: affirmed at 'CC', 'RR6'
Preferred stock and Tier 1 notes: affirmed at 'C', 'RR6'
State-guaranteed debt (IT0004804362): affirmed at 'BBB+'