OREANDA-NEWS. Fitch Ratings has placed Banca Popolare di Vicenza (BPV)'s 'BB' Long-term Issuer Default Rating (IDR) on Rating Watch Negative (RWN). Fitch has also affirmed BPV's Short-term IDR at 'B', Support Rating (SR) at '5' and Support Rating Floor (SRF) at 'No Floor'. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
The Rating Watch Negative reflects Fitch's expectation that BPV is likely to report significant losses that will require additional capital, potentially for a material amount and to be raised in a fairly short timeframe, which in our opinion bears significant execution risks.

Fitch expects BPV to report material losses, as early as when it approves its 1H15 results, given the recently appointed top management's mandate to undertake a thorough assessment of the bank's balance sheet assets, which we expect will result in high loan impairment, and potentially other, charges. In addition, the bank faces risk of further negative impact on capital following recent regulatory inspections.

Fitch will resolve the RWN once the amount of losses that the bank is likely to report in 2015 and the ultimate impact on its capital position is clarified and there is clear visibility on the timing, amount and execution of potential capital-strengthening initiatives.

The announced transformation of the bank into a public limited company (S.p.A.) and its subsequent listing, which may take place in early 2016, should enhance transparency and, over a fairly short period, improve its corporate governance. Fitch views the appointment of new management as a factor potentially contributing to a strengthening of the bank.

SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRFs reflect Fitch's 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. In Fitch's view, the EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks are now sufficiently progressed to provide a framework for resolving banks that is likely to require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

In the EU, BRRD has been effective in member states since 1 January 2015, including minimum loss absorption requirements before resolution financing or alternative financing (eg, government stabilisation funds) can be used. Full application of BRRD, including the bail-in tool, is required from 1 January 2016.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated lower Tier 2 debt issued by BPV is notched off BPV's VR once to reflect Fitch's view of loss severity risk based on their level of subordination. The absence of coupon flexibility means that non-performance risk is minimal, hence no further notching is applied.

RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
BPV's ratings will be downgraded if the bank fails to compensate losses with a strengthening of capital to maintain its capital ratios and net impaired loans-to-Fitch Core Capital at levels that are similar to those at end-2014, or if the process of strengthening capital becomes protracted.

Similarly, asset quality ratios (i.e. including Fitch's assessment of coverage levels) that are materially weaker than levels at end-2014 could lead to a downgrade. Depending on the resulting asset quality and capital profile of the bank, after new management completes the balance sheet assessment, and any remedial action that can be realistically achieved, BPV's ratings could be downgraded, including by several notches, or be affirmed.

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

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
BPV's subordinated debt rating is primarily sensitive to a change in the VR, which drives the debt rating, but also to a change in Fitch's view of non-performance or loss severity risk relative to BPV's viability.
The rating actions are as follows:

Long-term IDR: 'BB' placed on Rating Watch Negative
Short-term IDR: affirmed at 'B'
Viability Rating: 'bb' placed on Rating Watch Negative
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Long-term senior unsecured notes and EMTN programme: 'BB' placed on Rating Watch Negative
Short-term senior unsecured notes and EMTN programme: affirmed at 'B'
Subordinated Lower Tier 2 notes: 'BB-' placed on Rating Watch Negative