OREANDA-NEWS. Fitch Ratings has assigned Intesa Sanpaolo S.p.A.'s (IntesaSP) forthcoming issue of perpetual USD additional Tier 1 capital securities an expected rating of 'BB-(EXP)'.

The final rating is contingent on receipt of final documentation conforming to information already received.

KEY RATING DRIVERS
The notes are CRD IV-compliant, perpetual, deeply subordinated, fixed-rate additional Tier 1 debt securities, issued under IntesaSP's USD25bn medium term note programme. The notes have fully discretionary interest payments and are subject to write-down on breach of a 5.125% consolidated or unconsolidated common equity tier 1 (CET1) ratio.

The notes are rated five notches below IntesaSP's 'bbb+' Viability Rating (VR) - twice for loss severity relative to senior unsecured creditors and three times for incremental non-performance risk relative to IntesaSP's VR. The notching for non-performance risk reflects the instruments' fully discretionary interest payment, which Fitch considers the most easily activated form of loss absorption. Under the terms of the notes, the issuer will not make an interest payment (in full or in part) if it has insufficient distributable items. The 5.125% trigger only refers to a write-down of the notes.

The rating considers IntesaSP's transitional Basel III CET1 ratio at 30 June 2015 of 13.4% as well as its projected capital trajectory. This current ratio provides IntesaSP with over EUR23bn of CET1 buffer from the 5.125% CET1 ratio trigger. However, in Fitch's opinion, non-performance in the form of non-payment of interest would likely be triggered before this, possibly if the bank breaches its Pillar 2 CET1 capital requirement of 9% as established by the European Central Bank. The current CET1 ratio provides it with a buffer of over EUR12bn from this requirement. Fitch believes that IntesaSP's current CET1 ratio provides a sufficient buffer to limit the notching for non-performance risk to three notches.

The principal write-down can be reinstated and written up at full discretion of the issuer if a positive net income (unconsolidated or consolidated) is recorded. Fitch has assigned 50% equity credit to the securities, reflecting the agency's view that the 5.125% trigger is not so distant to the point of non-viability, which limits the instrument's "going concern" characteristics. It also reflects the notes' full coupon flexibility, their permanent nature and the subordination to all senior creditors.

RATING SENSITIVITIES
The rating of the securities is sensitive to a change in the VR. The rating is also sensitive to a change in their notching, which could arise if Fitch changes its assessment of their non-performance relative to the risk captured in IntesaSP's VR. This could reflect a change in capital management or flexibility or an unexpected shift in regulatory buffers and requirements, for example.

Intesa Sanpaolo is rated:
Long-term Issuer Default Rating (IDR): 'BBB+' with a Stable Outlook
Short Term IDR: 'F2'
Viability Rating: 'bbb+'
Support Rating: '5'
Support Rating Floor: 'No Floor'