OREANDA-NEWS. Fitch Ratings has assigned Unipol Banca S.p.A. a Long-Term Issuer Default Rating (IDR) of 'BB' with a Stable Outlook, a Support Rating (SR) of '3' and Viability Rating (VR) of 'ccc'. A full list of rating actions is at the end of this rating action commentary.

Unipol Banca is the banking arm of Unipol Gruppo Finanziario (UGF), one of Italy's largest insurers. The bank undertakes traditional retail and commercial banking activities with a clientele of individuals, companies and cooperatives.

KEY RATING DRIVERS

IDRS, SUPPORT RATING
Unipol Banca's IDRs and SR are based on institutional support from its ultimate parent company, UGF. The long-term IDR is notched twice off UGF's Long-Term IDR of 'BBB-' to reflect that the potential for disposal is high for the bank given its limited strategic importance within the insurance group, in our opinion. Its weak performance and financial profile also make its long-term prospects and attractiveness questionable.

Fitch acknowledges that ordinary support from UGF has been timely and sufficient when the need has arisen and we expect it to continue to support the bank in the future. In Fitch's opinion, reputational risk for UGF in case of default of its bank subsidiary would be high since the latter operates in the same jurisdiction, is subject to the same regulator and shares the same brand.

The notching also reflects that UGF ratings already incorporate expectations that its adequate capital and profitability are likely to be negatively affected by the extremely weak credit quality of its banking operations in the coming years which are likely to require support (see also: Fitch Rates Unipol Gruppo Finanziario 'BBB-' IDR; Outlook Stable).

The Stable Outlook is in line with that of UGF.

VR
Unipol Banca's VR reflects its extremely weak stand-alone financial profile. The stock of impaired loans was very high at 34% of gross loans at end-June 2015, materially deviating from sector averages. Its impaired loans coverage ratio, including the protection offered by an Indemnity Agreement signed with UGF, at 42% at end-June 2015 is not commensurate, in Fitch's view, to the underlying credit risk of the loan book, which has high exposure to single names and concentration in the construction and real estate sectors. Fitch expects impaired loans to increase, albeit at a slower pace than in the past, as the legacy impaired exposures migrate to riskier classes and coverage levels are re-aligned in the coming quarters.

High encumbrance by unreserved impaired loans (237% of Fitch Core Capital at end-June 2015, including UGF's indemnities) puts pressure on Unipol Banca's capitalisation. The bank has to date benefited from UGF's capital injections as the need has arisen. However, its capital levels remain weak. Its CET1 ratio of 8.4% at end-June 2015 was just above the minimum requirements and below the average of the Italian banks rated by Fitch.

Unipol Banca's record of low or negative operating results is long, reflecting its structurally weak revenue base and high operating costs. Loan impairment charges (LICs) have been extremely high in recent years reflecting the composition of its lending book in a recessionary economy; these in 1H15 eroded entirely its pre-impairment profits. More positively, reliance on more volatile revenues, such as securities gains, has to date been lower than at other domestic banks.

Our assessment of Unipol Banca's funding and liquidity considers the bank being part of a wider, stronger group. Its funding structure is acceptable with customer deposits accounting for over 60% of total non-equity funding, but their churn rate is higher than at other rated Italian banks. Dependence on the group's funding is lower than in the past representing about 11% of total funding but remains a feature of the bank. While standalone liquidity is weak, albeit slightly improving, in our opinion it benefits from the liquidity available from group entities.

Unipol Banca standalone assessment also benefits from being part of a financial conglomerate like UGF. This contributes to brand recognition for a bank whose franchise lacks in size and depth and whose ability to impose pricing is weak when compared to other rated domestic peers.

RATING SENSITIVITIES

IDRS, SUPPORT RATING
Unipol Banca's IDRs and SR are sensitive to a change in Fitch's assumptions around UGF's ability, as reflected in its Long-Term IDR of 'BBB-' with a Stable Outlook, and propensity to support its subsidiary. This means that the bank's ratings and Outlook are likely to move in tandem with UGF's. The ratings would also be affected by any change in our assessment of the propensity of UGF to support Unipol Banca which could change in the event of a disposal, or part-disposal, of the bank.

VR
A material deterioration of asset quality and capitalisation would trigger a downgrade of Unipol Banca's VR. The rating is also sensitive to liquidity pressures. A rating upgrade would require a material improvement in asset quality, a stronger capitalisation of the bank and a sustainable improvement of its structural profitability.

The rating actions are as follows:

Unipol Banca S.p.A.
Long-Term IDR assigned at 'BB'; Outlook Stable
Short-Term IDR assigned at 'B'
Viability Rating assigned at 'ccc'
Support Rating assigned at '3'