Fitch Downgrades Banca Popolare di Milano to 'BB+'; Viability Rating to 'bb-'/RWN

Mon Nov 18, 2013 12:11pm EST

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(The following statement was released by the rating agency) LONDON, November 18 (Fitch) Fitch Ratings has downgraded Banca Popolare di Milano's (BPM) Long-term Issuer Default Rating (IDR) to 'BB+' from 'BBB-' and removed it from Rating Watch Negative (RWN). The Long-term IDR is now at the bank's 'BB+' Support Rating Floor (SRF), which has been affirmed. The Outlook on the Long-term IDR is Negative. At the same time Fitch has downgraded BPM's Viability Rating (VR) to 'bb-' from 'bbb-'. BPM's VR remains on RWN. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRs, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT BPM's Long-term IDR is at the bank's 'BB+' Support Rating Floor (SRF) and reflects potential support from the Italian authorities. Fitch has affirmed BPM's Support Rating (SR) and SRF, which reflect Fitch's view that there is a moderate probability that the authorities would provide support to BPM if required because of BPM's strong franchise in its home region of Lombardy and its relatively large customer funding base. The Negative Outlook on BPM's Long-term IDR is in line with the Outlook on Italy's 'BBB+' Long-term IDR. RATING SENSITIVITIES - IDRs, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT BPM's Long-term IDR, SR, SRF and senior debt ratings are sensitive to a change in Fitch's assumptions about the propensity or ability of the Italian authorities to provide timely support to the bank. The Italian state's ability to provide such support is dependent upon its creditworthiness, reflected in its Long-term IDR. A downgrade of Italy's sovereign rating would reflect a weakened ability of the state to provide support and therefore likely result in the downward revision of BPM's SRF. BPM's SR and SRF are also sensitive to changes in the agency's assumptions around the propensity of support, in light of the weakening of legal, regulatory, political and economic dynamics about potential future sovereign support for senior creditors of banks across jurisdictions, as indicated in "The Evolving Dynamics of Support for Banks" and "Bank Support: Likely Rating Paths", both dated 11 September 2013 at www.fitchratings.com. Any downward revision of BPM's SRF would lead to a downgrade of the bank's Long-term IDR. In line with Fitch's criteria, the bank's Long-term IDR is the higher of the VR and the SRF. KEY RATING DRIVERS -VR The downgrade of BPM's VR reflects Fitch's view that uncertainty over the bank's future strategy and its ability to strengthen capitalisation has increased following the delay in the bank's shareholders reaching an agreement on how to strengthen the bank's corporate governance. This has also led to a delay in the planned EUR500m capital increase. At BPM, a small group of active current and retired employee shareholders with close links to the unions have at times blocked strategic and restructuring proposals. The process of strengthening BPM's corporate governance has come to a standstill as shareholders could not reach an agreement on how to improve the bank's corporate governance. The bank's CEO, who had contributed to the bank's progress in improving cost efficiency, resigned in late October 2013, and an Ordinary Shareholders' Meeting has been called in December 2013 to appoint a new supervisory board, which in turn will have to nominate a new management board. The uncertainty over the future composition of the bank's key decision taking bodies means that uncertainty over the bank's future governance and strategy has increased materially at a time when BPM needs to strengthen its capitalisation further by the announced EUR500m. Excluding higher risk weightings imposed by the regulator in 2011, BPM's Basel 2.5 Core Tier 1 ratio at end-9M13 stood at 8.9%, which compares adequately with its direct domestic peers. However, the reported statutory ratio was lower at 7.25%, below the 8% Basel III CET1 ratio set by the European Central Bank as the minimum ratio for its asset quality review. BPM's performance, with the exception of asset quality, has improved, and the bank reported a EUR139m net profit for 9M13. BPM's VR continues to reflect its deteriorating asset quality, its above-average exposure to the real estate and construction sectors and increasing impaired loans. BPM's efficiency has improved and funding and liquidity are acceptable. Its impaired loans ratios reached 11% at end-9M13, which is however still lower than at most of its peers and below the average for the sector. Coverage levels are acceptable, but Fitch expects loan impairment charges to remain high. RATING SENSITVITIES - VR The RWN on BPM's VR reflects Fitch's view that failure to reach a durable solution for the bank's future corporate governance, which would make a successful capital increase more uncertain, would result in a downgrade of its VR. Doubts over the bank's ability to raise capital would likely result in a downgrade of its VR by more than one notch, most likely to the 'b' range, to reflect the increased risks to the bank's viability. BPM's VR would also come under pressure if asset quality deterioration was materially worse than currently expected by the agency, or if liquidity and funding weakened. Any upgrade of BPM's VR would require a credible strengthening of its corporate governance, higher capital levels (through the announced EUR500m capital increase and the removal of the higher risk-weightings imposed by the regulator) and improving asset quality ratios. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated notes issued by BPM are notched down from its VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. Their rating is primarily sensitive to any change in the bank' VR but also to any change in Fitch's view of non-performance or loss severity risk relative to the bank's viability. The rating of the preferred stock and hybrid capital instruments reflects their non-performance in the form of non-payment of interest. Their rating is sensitive to changes in Fitch's view of their loss severity. Banca Popolare di Milano Long-term IDR: downgraded to 'BB+' from 'BBB-'; RWN removed; Outlook Negative Short-term IDR: downgraded to 'B' from 'F3'; RWN removed Viability Rating: downgraded to 'bb-' from 'bbb-'; RWN maintained Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB+' Senior unsecured notes and EMTN programme: downgraded to 'BB+'/'B' from 'BBB-'/'F3'; RWN removed Subordinated Lower Tier 2 debt: downgraded to 'B+' from 'BB+'; RWN maintained Preferred stock and hybrid capital instruments: affirmed at 'CCC' Contact: Primary Analyst Francesca Vasciminno Senior Director +39 02 87 90 87 225 Fitch Italia S.p.A. V.lo S. Maria alla Porta 1 20121 Milan Secondary Analyst Manuela Banfi Associate Director +39 02 87 90 87 202 Committee Chairperson Christian Scarafia Senior Director +39 02 87 90 87 212 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012; 'Evaluating Corporate Governance', dated 12 December 2012; 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Evaluating Corporate Governance here Assessing and Rating Bank Subordinated and Hybrid Securities here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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