OREANDA-NEWS. Fitch Ratings has affirmed Intesa Sanpaolo S.p.A.'s (IntesaSP) and its Italian bank subsidiaries' Long-term Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlook.

The rating actions follow a periodic review of the Italian banking group. The banks' Long-term IDRs are driven by its standalone creditworthiness as expressed by the Viability Rating (VR).

KEY RATING DRIVERS
VRs, IDRs AND SENIOR DEBT
The ratings of IntesaSP reflect its strong and diversified domestic franchise as the second- largest Italian bank, which has supported better-than-peers operating performance. They also reflect resilient capitalisation, driven by reasonable internal capital generation, and an adequate funding and liquidity profile.

The VR faces pressures from IntesaSP's weak asset quality, which compares unfavourably with international peers, and from a fairly large proportion of capital being tied to unreserved impaired loans.

Despite these pressures, the Outlook remains Stable, underpinned by initial signs of a net reduction of impaired loans (by EUR1.4bn in 4Q15) and, most importantly, Fitch's assumption that the reduction will accelerate over the course of 2016, while maintaining the impaired loan coverage ratio at around 50%. This should also help to alleviate pressure on capital from high unreserved impaired loans.

IntesaSP's profitability is a distinctive strength compared with that of other commercial banks in Italy and its profitability ratios are also adequate by international comparison. Its operating profitability is supported by a greater diversification of the revenue structure, reflecting a business model that contains a fairly large portion of fee-intensive activities (e.g. asset management and insurance), allowing it to better compete in a low-interest rate environment. This characteristic, combined with strict control over operating costs and reduced loan impairment charges, resulted in improved operating profit in 2015. Fitch expects that if the economy in Italy remains supportive, IntesaSP will continue generating adequate returns and capital.

At end-2015, the bank reported a fully loaded CET1 ratio of 13.1%, which compares well with domestic and international peers. The bank's regulatory leverage ratio of 6.8% is robust and among the highest reported by international peers in the same rating category. Our assessment of the bank's capital also considers the high ratio of unreserved impaired loans to Fitch Core Capital (FCC), over 80% at end-2015, which, however, has remained stable.

With a ratio of gross impaired loans to total loans at above 17% (as calculated by Fitch) at end-2015, Intesa's asset quality is weak by international standards. Asset quality problems reflect the impact of the prolonged recession in Italy during 2011-2014 on the bank given its domestic focus. Coverage of impaired loans by reserves is adequate at above 50% and at the high end of the range among Italian peers.

Management of impaired loans has not yet resulted in meaningful reductions as IntesaSP's preferred strategy so far has been to gradually work them out and protect collateral values rather than sell larger portfolios. However, Fitch assumes that the bank is committed to accelerating the pace of reduction of its large impaired loans stock over the course of 2016 and beyond, which should result in a material reduction of impaired loan volumes. IntesaSP also has some financial flexibility to absorb potential losses on impaired loans sales.

Progress on asset quality improvement will also depend on Italy's economy, which we expect to grow only modestly by 1% in 2016 and 1.3% in 2017, and the effectiveness of legislative initiatives aimed at reducing Italian banks' impaired loans.

The bank's funding is resilient and adequately diversified through a combination of capability to retain and enlarge customer deposits via its large domestic franchise and its access to the international wholesale markets for various debt classes and maturities. Liquidity is also commensurate with the ratings and capital ratios are consistently above the regulatory minimum.

The ratings of the senior debt issued by IntesaSP's funding vehicles, Intesa Sanpaolo Bank Ireland, Societe Europeenne de Banque SA and Intesa Funding LLC, are equalised with that of the parent since the debt is unconditionally and irrevocably guaranteed by IntesaSP.

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

AT1 notes are currently rated five notches below the bank's VR, comprising two notches for loss severity relative to senior unsecured creditors and three notches for incremental non-performance risk relative to the VR. The notching for non-performance risk reflects the instruments' fully discretionary interest payment.

SUBSIDIARY AND AFFILIATED COMPANY
The ratings of IntesaSP's Italian subsidiaries, Banca IMI and Cassa di Risparmio di Firenze, reflect Fitch's view of the core function of the subsidiaries within the group. Cassa di Risparmio di Firenze's ratings have been withdrawn for commercial reasons. Fitch will no longer provide ratings or analytical coverage of Cassa di Risparmio di Firenze.

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.

RATING SENSITIVITIES
VR, IDRs AND SENIOR DEBT
IntesaSP's ratings are sensitive to the operating environment in Italy, particularly in relation to the recent initiatives aimed at addressing Italian banks' asset quality.

IntesaSP's ratings could be downgraded if the bank fails to accelerate the reduction in the stock of impaired loans or if its capital remains highly exposed to unreserved impaired loans. Similarly, a deterioration of the bank's funding and liquidity profile would put pressure on the ratings as well as signs of an inflexible dividend policy.

While upside potential is limited, an upgrade would be contingent on a sovereign upgrade accompanied by marked and consistent improvements in asset quality and capital, particularly the amount of capital tied to unreserved impaired loans.

The ratings of the senior debt issued by IntesaSP's funding vehicles, Intesa Sanpaolo Bank Ireland, Intesa Sanpaolo Bank Luxembourg, S.A. and Intesa Funding LLC, are sensitive to the same considerations that affect the senior unsecured debt issued by the parent.

SUBSIDIARY AND AFFILIATED COMPANY
Banca IMI's ratings are based on its parent's Long-term IDRs, they are sensitive to changes in IntesaSP's propensity to provide support respectively and to changes in the parent's Long-term IDRs.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of the securities are sensitive to a change in the bank's VR. The ratings are also sensitive to a change in the notes' notching, which could arise if Fitch changes its assessment of their non-performance relative to the risk captured in the VR. For AT1 issues this could reflect a change in capital management or flexibility or an unexpected shift in regulatory buffers and requirements, for example.

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

The rating actions are as follows:

IntesaSP
Long-term IDR: affirmed at 'BBB+'; Outlook Stable
Short-term IDR: affirmed at 'F2'
VR: affirmed at 'bbb+'
SR: affirmed at '5'
SRF: affirmed at 'No Floor'
Senior debt (including debt issuance programmes): affirmed at 'BBB+'/ 'F2'
Commercial paper/certificate of deposit programmes: affirmed at 'F2'
Short-term deposits 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'
AT1 notes: affirmed at 'BB-'

Cassa di Risparmio di Firenze:
Long-term IDR: affirmed at 'BBB+'; Outlook Stable; rating withdrawn
Short-term IDR: affirmed at 'F2'; rating withdrawn
SR: affirmed at '2'; rating withdrawn
Senior debt (including programme ratings): affirmed at 'BBB+'; rating withdrawn

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:
Commercial paper/Short-term debt affirmed at 'F2'
Senior unsecured debt: affirmed at 'BBB+'

Intesa Sanpaolo Bank Luxembourg, S.A.:
Commercial paper and Short-term debt: affirmed at 'F2'
Senior unsecured debt: affirmed at 'BBB+'

Intesa Funding LLC:
US commercial paper programme: affirmed at 'F2'

In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.