Fitch Takes Rating Actions on 4 Large Italian Banks
The Outlooks on UniCredit's and UBI's Long-term IDRs have been revised to Stable from Negative. The Outlook on IntesaSP's Long-term IDR is Stable. The Outlook on the Long-term IDR of MPS is Negative.
The rating actions follow a periodic review of the four banking groups. A full list is at the end of this rating action commentary.
KEY RATING DRIVERS AND RATING SENSITIVITIES -SUPPORT RATINGS AND SUPPORT RATING FLOORS (SRF) - INTESASP, UNICREDIT, UBI BANCA, MPS
The affirmation of the 'BBB' SRFs reflects Fitch's assessment of support available from Italian authorities for the country's largest banks given their domestic systemic importance.
The four banks' SRs and SRFs are sensitive to Fitch's assumptions around either the ability or propensity of Italy to provide timely support. Fitch has assessed that the propensity of the Italian state to provide support is weakening and the ratings are therefore primarily sensitive to further progress made in implementing the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks. The directive requires 'bail in' of creditors by 2016 before an insolvent bank can be recapitalised with state funds. A functioning SRM and progress on making banks 'resolvable' without jeopardising the wider financial system are areas of focus for eurozone policymakers. Once these are operational they will become an overriding rating factor, as the likelihood of banks' senior creditors receiving full support from the sovereign if ever required, despite their systemic importance, will diminish substantially, unless mitigating factors emerge.
The BRRD is being enacted into EU legislation and progress on establishing the SRM is being made to the point that Fitch expects to downgrade the banks' SRs to '5' and revise the SRFs downwards to 'No Floor' during 2Q15.
The Italian state's ability to provide timely support to the banks is dependent upon its creditworthiness, reflected in its Long-term IDR of 'BBB+'/Stable. A downgrade of Italy's sovereign rating would reflect a weakened ability of the state to provide support and therefore likely result in the downward revision of the large Italian banks' SRFs.
MPS
KEY RATING DRIVERS AND SENSITIVITIES - IDRs AND SENIOR DEBT
MPS's IDRs and senior debt ratings are driven by their SR and SRF and therefore consider Fitch's assessment of the high likelihood of support being made available to MPS from the Italian authorities in case of need. They reflect MPS's domestic systemic importance.
As the IDRs are driven by the bank's SR and SRF, they are predominantly sensitive to the same considerations. The Negative Outlook on the Long-term IDR therefore reflects Fitch's view of reducing likelihood support from the sovereign. We expect to revise MPS's SRF in 2Q15, at which point its Long- and Short-term IDRs and senior debt ratings would likely be downgraded to the level of its VR. The IDRs will also factor in Fitch's assessment of the level of protection offered to MPS's senior creditors by outstanding loss absorbing junior instruments and will also consider the bank's plans to raise junior debt.
KEY RATING DRIVERS - VR
The upgrade of MPS's VR reflects the significant capital raised by the bank in 2014 and about to be raised in 2015 and the progress it has made in improving its pre-impairment operating profitability. Nonetheless, MPS's asset quality remains weak, a factor which Fitch considers to be of higher importance in its assessment of the bank's VR
Impaired loans accounted for approximately 30% of gross loans at end-2014 and place significant pressure on both the bank's profitability and capitalisation. Fitch expects MPS's asset quality to continue to deteriorate, albeit at a reduced pace, and that additional loan impairment charges (LICs) will have to be made as loans season. The bank reported a EUR5.3bn net loss in 2014 after LICs of EUR8.3bn, nearly 6.5x its pre-impairment operating profit. Fitch acknowledges that a large part (EUR6bn) of the LICs reported in 2014 is non-recurring as they reflect the adjustments required by the European regulator.
However, Fitch believes that it will be challenging for MPS to return to operating profitability unless management undertakes significant actions to reduce the stock of impaired loans through sales, which in the absence of a meaningful secondary market for doubtful loans disposals are likely to be undertaken below book value, and reduce LICs. We believe therefore that overall performance will remain structurally weak in the medium term.
Capitalisation also remains a relative weakness despite the EUR5bn capital increase received in July 2014 and the additional EUR3bn received in 2Q15. Fitch does not consider these amounts sufficient to stabilise MPS's financial condition, particularly if asset quality continues to deteriorate. At end-2014, unreserved impaired loans accounted for a very high 250% of Fitch core capital (FCC; on a proforma basis including the EUR3bn capital increase), which in our opinion represents a key vulnerability and a limiting factor to any meaningful turnaround of the bank.
RATING SENSITIVITIES - VR
The VR would be downgraded if further losses eroded capital materially, indicating the bank's non-viability despite the significant capital injections received in 2014 and 2015.
An upgrade of MPS's VR would require a material improvement in asset quality and a sustainable turnaround in profitability.
IntesaSP
KEY RATING DRIVERS - IDRS, SENIOR DEBT AND VR
IntesaSP's IDRs are driven by its VR. The ratings reflect its robust capitalisation and low leverage, which are key factors in assessing is standalone creditworthiness. They also consider its solid funding profile and recovering operating performance.
In reaching its assessment of IntesaSP's VR, Fitch has also considered IntesaSP's relatively weak asset quality, which reflects the strong recession in Italy since 2011 given IntesaSP's domestic focus.
At end-2014, the bank reported a phased-in CET1 ratio of 13.6% which compares well with domestic and international peers. The bank's regulatory leverage ratio of above 7% is robust and among the highest reported by international peers in the same rating category.
However, the bank's capital remains exposed to movements in asset prices as a result of the relatively high ratio of unreserved impaired loans to CET1 (70% at end-2014). We do not expect this figure to substantially diminish during 2015, despite the group's dedicated strategy and organisation in the management of impaired loans.
The bank's funding is resilient and adequately diversified. It remains supported by IntesaSP's capability to retain depositors through its large domestic franchise and to access the international wholesale markets for various debt classes and maturities. Central bank funding utilisation, mainly in the form of T-LTRO amounts to 2%-3% of total assets, which is below the average of its domestic peers. Liquidity is also sound and regulatory ratios consistently above the minimum.
IntesaSP's profitability recovered in 2014 supported by a resilient net interest income, the double digit growth of recurrent commission income and strict control over operating costs. Fitch expects the group's pre-impairment profitability to remain among the strongest domestically, while reduced pressure from loan impairment charges should further support bottom-line profitability in the coming quarters. Fitch believes that IntesaSP's ability to adapt its strategic objectives to the structural changes that took place during the last economic cycle in the domestic operating environment is above average and its execution capability contributed to the recovery of the group's profitability.
Gross impaired loans at over 16% of gross loans at end-2014 are high by international standards and Fitch does not expect them to decrease materially in the coming quarters, although the group's recently strengthened focus on the management of non-core assets should bring some benefits. Loan loss reserves at above 55% are high among Italian peers and are complemented by adequate collateral, primarily in the form of real estate.
The rating of the senior debt issued by IntesaSP's funding vehicles, Intesa Sanpaolo Bank Ireland, Societe Europeenne de Banque SA and Intesa Funding LLC is equalised with that of the parent since it is unconditionally and irrevocably guaranteed by IntesaSP and is sensitive to the same considerations as the senior unsecured debt issued by the parent.
RATING SENSITIVITIES - IDRS, SENIOR DEBT AND VR
IntesaSP's IDR is sensitive to movements in its VR. The Stable Outlook reflects Fitch's expectations that profitability will continue to recover supported by revenue diversification and rigid costs control protecting the bank's robust capital position
Fitch considers IntesaSP's credit profile to be closely linked to the sovereign's as the bulk of the group's operations are located in Italy. IntesaSP would therefore be sensitive to a downgrade of the sovereign rating, which would result in a downgrade of the bank's VR and Long-term IDR. Any currently unexpected material erosion of the bank's capitalisation or deterioration in liquidity could also result in a downgrade of IntesaSP's VR.
An upgrade of Italy's Long-term IDR would likely but not automatically trigger an upgrade of IntesaSP's VR and Long-term IDR. However, this would also require a marked reduction of the stock of impaired loans and of the group's capital-at-risk from the unreserved portion of this stock.
UBI
KEY RATING DRIVERS - IDRS, SENIOR DEBT AND VR
UBI's IDRs are based on its VR. The downgrade of UBI's VR and IDRs reflects the bank's deteriorated asset quality with a level of net impaired loans that by end-2014 had increased to a high 90% of FCC. UBI's ratings continue to reflect its sound capitalisation, stable funding and liquidity, low risk appetite and sound franchise. The ratings also take into consideration the recovery in its operating profitability.
UBI's FCC ratio of 13.5% at end-2014, its estimated FLB3 ratio of above 11.5% and its leverage ratio indicate a comfortable capital position.
However, UBI's impaired loans have materially risen during the domestic recession. Gross impaired loans reached a high 13% of gross loans at end-2014. This figure is better than average in Italy, reflecting its operations in wealthy northern Italy and its adequate underwriting policies, but is weak when compared internationally. The reserve coverage of impaired loans takes into consideration the high proportion of collateral backing its loans, which predominantly consist of long-term loans, backed by real estate, written at low loan-to-values. Furthermore, the bank has a more active write-off practice than generally seen in Italy. Fitch views positively the adequacy of UBI's coverage levels from the outcome of the ECB transparency exercise in 2014, which required limited additional provisioning compared with its domestic peers.
UBI's pre-impairment operating profitability shows some improvement but its ability to generate earnings is weaker than its higher rated domestic peers with a wider domestic and international franchise. Fitch expects some moderate reduction in LICs in 2015, which should support some improvement in operating profitability together with the prospects of lower costs and stronger net interest income from reduced funding costs.
RATING SENSITIVITIES - IDRs, SENIOR DEBT AND VR
The bank's ratings could come under pressure if capital was eroded by material losses or acquisitions, events that are currently not factored into the ratings. Continued material asset quality deterioration, or weaker funding or liquidity profiles would also lead to a downgrade.
The rating of the senior debt issued by UBI's funding vehicle in Luxembourg, UBI Banca International SA is equalised with the parent since it is unconditionally and irrevocably guaranteed by UBI and is sensitive to the same considerations as the senior unsecured debt issued by the parent.
UniCredit
KEY RATING DRIVERS - VR, IDRs AND SENIOR DEBT
UniCredit's IDRs are based on its VR and are underpinned by its broad international franchise, diversified funding profile low risk appetite and acceptable capitalisation. The VR also reflects its portfolio of impaired exposures, largely generated by its Italian corporate exposures, which will remain a drag on the bank's profitability and risk profile unless more material disposals take place.
The revision of the Outlook to Stable from Negative reflects improvements in its overall operating performance throughout 2014 and 2015, aided by its reduced risks, and more focused strategy in managing its large portfolio of impaired and non-core exposures. Operating revenues generated by UniCredit's Italian franchise improved over 2014, and LICs reduced after the significant impairments reported in 2014 and strengthened coverage ratios. Fitch believes that the improvements in the group's operating profitability are sustainable and expects further strengthening.
The group is exposed to developing countries where the operating environment has deteriorated materially over the past 12 months, Russia in particular, or where political risk is higher than in its western European markets. However, the balance of risks is adequately diversified, managed and controlled. A reduced contribution to operating profitability from some of its developing markets in view of the changed operating environment is a possibility but this should be compensated by further improvements in its Italian home market.
The rating of the senior debt issued by UniCredit's funding vehicles, UniCredit Bank (Ireland) plc, and UniCredit International Bank Luxembourg SA is equalised with those of the parent since it is unconditionally and irrevocably guaranteed by UniCredit and is sensitive to the same considerations as the senior unsecured debt issued by the parent.
RATING SENSITIVITIES - VR, IDRs, AND SENIOR DEBT
Unicredit's IDRs and VR are sensitive to developments in its profitability and asset quality.
UniCredit's IDRs and VR are sensitive to Fitch's assumptions regarding the risk profile and profitability of its significant foreign operations, which to date have been supportive of the ratings given the weak operating environment in Italy. These foreign subsidiaries have shown significant dividend payment potential and sound internal capital generation.
Progress towards banking union in the eurozone, ensuring improved capital and funding fungibility, is supportive of UniCredit's VR.
As a result of its international diversification, UniCredit's risk profile is somewhat less correlated with the sovereign's risk profile than its domestic peers. Depending on the interplay between domestic performance and benefits from its international presence, UniCredit could potentially be rated one notch above Italy's sovereign as its Italian operations improve and legacy impaired assets are reduced. Conversely, should the risk profile and profitability of the group's large activities in Germany (UniCredit Bank AG, which consolidates much of UniCredit's corporate and investment banking, A+/Negative/a-), Austria and CEE (UniCredit Bank Austria AG, which consolidates UniCredit's CEE activities except Poland; A/Negative/bbb+) and Poland (Bank Pekao SA; A-/Stable/a-) structurally worsen, this could be negative for UniCredit's ratings.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES (ALL BANKS)
Subordinated debt and other hybrid capital issued by the banks are all notched down from their VRs, or from the VR of their parent if the issuer has no VR, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in the VRs, which drive the ratings.
The ratings of MPS's Lower Tier 2 and Upper Tier 2 debt have been upgraded in line with the bank's VR, reflecting a reduced, but still high risk of non-performance. The ratings of its Tier 1 instruments and preferred securities have been affirmed at 'C' to reflect their non-performance and Fitch's expectation that the securities are unlikely to resume coupon payments in the near future, at least until the bank utilises state aid and reports net losses
KEY RATING DRIVERS AND SENSITIVITIES - 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 honor 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 Issuer Default Rating.
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 by the notes' Long-term ratings.
SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS AND SENSITIVITIES
IntesaSP's Italian subsidiaries' ratings, Banca IMI and Cassa di Risparmio di Firenze, reflect Fitch's view of the core function of these subsidiaries in the group. As their ratings are based on their parent's Long-term IDR, they are sensitive to changes in IntesaSP's propensity to provide support, which Fitch does not expect, and to changes in the parent's Long-term IDR.
The rating actions are as follows:
MPS:
Long-term IDR: affirmed at 'BBB'; Outlook Negative
Short-term IDR: affirmed at 'F3'
VR: upgraded to 'b-' from 'ccc'
SR: affirmed at '2'
SRF: affirmed at 'BBB'
Debt issuance programme (senior debt): affirmed at 'BBB'
Senior unsecured debt: affirmed at 'BBB'
Lower Tier 2 subordinated debt: upgraded to 'CCC' from 'CC'
Upper Tier 2 subordinated debt: upgraded to 'CC' from 'C'
Preferred stock and Tier 1 notes: affirmed at 'C'
State-guaranteed debt (IT0004804362): affirmed at 'BBB+'
IntesaSP
Long-term IDR: affirmed at 'BBB+'; Outlook Stable
Short-term IDR: affirmed at 'F2'
VR: affirmed at 'bbb+'
SR: affirmed at '2'
SRF: affirmed at 'BBB'
Senior debt (including debt issuance programmes): Long-term rating affirmed at 'BBB+'; Short-term rating affirmed at 'F2'
Commercial paper/certificate of deposit programmes: affirmed at 'F2'
Senior market-linked notes: affirmed at 'BBB+emr'
Subordinated lower Tier II debt: affirmed at 'BBB'
Subordinated upper Tier II debt: affirmed at 'BB+'
Tier 1 instruments: affirmed at 'BB'
Short-term deposits affirmed at 'F2'
Cassa di Risparmio di Firenze:
Long-term IDR: affirmed at 'BBB+'; Outlook Stable
Short-term IDR: affirmed at 'F2'
SR: affirmed at '2'
Senior debt (including programme ratings): affirmed at 'BBB+'
Banca IMI S.p.A.:
Long-term IDR: affirmed at 'BBB+'; Outlook Stable
Short-term IDR: affirmed at 'F2'
SR: affirmed at '2'
Senior debt (including programme ratings): affirmed at 'BBB+'
Intesa Sanpaolo Bank Ireland plc (no issuer ratings assigned):
Commercial Paper/Short-term debt affirmed at 'F2'
Senior unsecured debt: affirmed at 'BBB+'
Societe Europeenne de Banque SA (no issuer ratings assigned):
Commercial Paper and Short-term debt: affirmed at 'F2'
Senior unsecured debt: affirmed at 'BBB+'
Intesa Funding LLC (no issuer ratings assigned):
US Commercial Paper Programme: affirmed at 'F2'
UBI:
Long-term IDR: downgraded to 'BBB' from 'BBB+'; Outlook revised to Stable from Negative
Short-term IDR: downgraded to 'F3' from 'F2'
VR: downgraded to 'bbb' from 'bbb+'
SR: affirmed at '2'
SRF: affirmed at 'BBB'
Senior debt (including programme ratings): downgraded to 'BBB/F3' from 'BBB+/F2'
UBI Banca International S.A. (no issuer ratings assigned):
Commercial paper/certificate of deposit programmes: downgraded to 'F3' from 'F2'
UniCredit S.p.A.:
Long Term IDR: affirmed at 'BBB+'; Outlook revised to Stable from Negative
Short Term IDR: affirmed at 'F2'
VR: affirmed at 'bbb+'
SR: affirmed at '2'
SRF: affirmed at 'BBB'
Senior unsecured debt: affirmed at 'BBB+'
Lower Tier 2 notes: affirmed at 'BBB'
Upper Tier 2 notes: affirmed at 'BB+'
Preferred stock: affirmed at 'BB'
Additional Tier 1 Capital Notes: affirmed at 'BB-'
UniCredit Bank (Ireland) p.l.c. (no issuer ratings assigned):
Senior unsecured notes: affirmed at 'BBB+'/F2
UniCredit International Bank (Luxembourg) S.A. (no issuer ratings assigned):
Senior unsecured notes: affirmed at 'BBB+'.
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