OREANDA-NEWS. February 16, 2016. Fitch Ratings has downgraded Banca Popolare di Vicenza's (BPV) Long-term Issuer Default Rating (IDR) to 'B-' from 'B+' and Viability Rating (VR) to 'b-' from 'b+' and placed the ratings on Rating Watch Negative (RWN). A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
The downgrade primarily reflects the worsening in BPV's liquidity position following a significant deposit outflow since our last rating review in October 2015. The deposit loss was concentrated in the last four months of 2015 following the Italian tax police investigation on the misplacement of the two capital increases conducted in 2013 and 2014 and the resolution of four Italian local banks under special administration. The latter resulted in some depositors, initially the more volatile institutional and corporate counterparties followed by retail clients, withdrawing money from some among the weaker Italian banks, including BPV.

Fitch believes that BPV's franchise value has significantly weakened in recent months, including in retail funding, and that opportunities to issue wholesale bonds are also limited in the current financial market environment, potentially limiting the bank's ability to attract liquidity through these channels.

Fitch notes that since 4Q15 BPV has increased its reliance on ECB short-term refinancing facilities as well as secured operations with institutional counterparties, which strongly decreased its available counterbalancing capacity. Management is also taking actions to generate additional assets that can be used for central bank refinancing or in secured bilateral transactions, although this is likely to result in a higher balance sheet encumbrance. BPV is also trying to apply competitive pricing to re-attract larger depositors, which may impact its funding costs.

BPV's asset quality further deteriorated in 2H15, with impaired loans accounting for about 30% of gross loans at end-2015 from around 25% in June 2015. Fitch expects further asset quality deterioration in the short to medium term. The capital position is very weak, with a Common Equity Tier 1 ratio of 6.65% at end-2015, suffering from around EUR1.4bn of net losses reported in 2015 and the regulatory filters applied to capital by the regulator in relation to the capital raised by the bank in 2013 and 2014. The bank has announced a capital plan, which includes a EUR1.5bn capital increase to be completed in 2Q16 with the aim of bringing the CET1 ratio above 12% and the disposal of impaired exposures and non-core assets.

The RWN reflects heightened execution risks regarding the bank's ability to implement a successful turnaround and deliver on its business plan targets, including the listing on the stock exchange and the capital increase. For the latter, Fitch takes comfort from the presence of a preliminary underwriting agreement from UniCredit S.p.A. (BBB+/Stable) but the agency also believes that the currently difficult financial markets could potentially delay the operation or prevent its successful completion.

Fitch rates BPV's senior unsecured obligations in line with the bank's Long-term IDR. Fitch has also assigned a Recovery Rating 4 (RR4) to these instruments to reflect the expectation of average recovery prospects for creditors in the event of default.

SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
The SR and SRF 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. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) 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
Subordinated Tier 2 debt issued by BPV is rated 'CC' and is notched off once from the VR to reflect the instruments' loss severity and once to reflect non-performance risk asFitch views that these instruments could be vulnerable to burden sharing ahead or upon a hypothetical resolution scenario. Fitch also assigns a Recovery Rating 5 (RR5) to these instruments to reflect below average recovery prospects for subordinated bondholders.

RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
Should BPV experience further material deposit outflows in the coming months or delay or fail to execute the capital increase planned for 2Q15, the ratings would be downgraded to reflect the bank's heightened risk of non-viability on a stand-alone basis.

Ratings upside potential at the moment is very limited. Any upgrade would require evidence of a successful turnaround, including stronger capital levels, sustainable improvements in its liquidity position, in operating profitability and in asset quality.

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: downgraded to 'B-' from 'B+', and placed on RWN
Short-term IDR: affirmed at 'B'
Viability Rating: downgraded to 'b-' from 'b+'; and placed on RWN
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Long-term senior unsecured notes and EMTN programme: downgraded to 'B-' from 'B+'; placed on RWN; RR4 assigned
Short-term rating on EMTN programme: affirmed at 'B'
Subordinated debt: downgraded to 'CC' from 'B'; RR5 assigned