Fitch Affirms Carige and BPM's IDRs; Maintains VRs On RWN

Fri Feb 14, 2014 12:11pm EST

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(The following statement was released by the rating agency) MILAN/LONDON, February 14 (Fitch) Fitch Ratings has affirmed Banca Carige's (Carige) and Banca Popolare di Milano's Long-term Issuer Default Ratings (IDRs) at 'BB' and 'BB+', respectively, with Negative Outlooks. It has also maintained Carige's and BPM's Viability Ratings (VR) on Rating Watch Negative (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 Both banks' Long-term IDRs are at their Support Rating Floors (SRF) and both reflect potential support from the Italian authorities. Carige's Support Rating (SR) and SRF reflect Fitch's view that there is a moderate probability that the authorities would provide support to Carige if required because of its franchise in its home region of Liguria and its relatively large customer funding base. Similarly, BPM's SR and SRF 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 Outlooks on BPM's and Carige's Long-term IDRs are in line with the Outlook on Italy's 'BBB+' Long-term IDR. RATING SENSITIVITIES - IDRs, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT Carige's and 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 banks. 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 Carige's and BPM's SRFs. Carige's and BPM's SRs and SRFs are also sensitive to changes in Fitch'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 Carige's and BPM's SRF would lead to a downgrade of the banks' Long-term IDRs. In line with Fitch's criteria, the banks' Long-term IDRs are the higher of their respective VR or SRF. KEY RATING DRIVERS - VRs Carige's 'b-' VR reflects its weak capitalisation combined with a significant deterioration in asset quality and operating performance. The VR has been maintained on RWN because the EUR800m capital strengthening plan announced in early 2013 and originally planned to be completed by end-2013, which included significant asset disposals, has been only partially implemented to date. In January 2014 Carige sold its asset management subsidiary for EUR101m, with a gain of EUR93m and a positive impact of about 40 bp on the bank's core Tier 1 ratio, while the disposal of the two insurance subsidiaries, which was key to the execution of the capital strengthening plan, remains undefined. As a result, the bank will issue new shares to improve its capitalisation. The new share issue will likely be launched in 2Q14. Carige's Board of Directors is authorised to issue new shares equivalent to a maximum of EUR800m. The bank's largest shareholder, a banking foundation, has only limited financial strength and its share will likely be diluted. Carige's Fitch core capital (FCC) ratio was a low 6.2% at end-9M13 and likely fell below 6% at end-2013 as Fitch expects Carige to report a significant operating loss for 4Q13. The regulatory core Tier 1 ratio at end-9M13 stood at 5.8%, well below the 8% Basel III CET1 ratio set by the European Central Bank as the minimum ratio for its asset quality review. Some benefit to capital ratios will come from the sale of its asset management subsidiary and lower capital deductions from the conversion of deferred tax assets into tax credits. Capitalisation is weak relative to the bank's high level of unreserved impaired loans, which account for more than 200% of FCC. Carige's asset quality has deteriorated sharply and is weak. The bank's gross impaired loans/total loans ratio reached 16.2% at end- 9M13, up from 9.5% at end-3M13, and coverage of impaired loans is low at 37%. Reported impaired loans and LICs likely rose further in 4Q13 and Fitch expects end-2013 asset quality ratios to have deteriorated further compared with 9M13. Carige's profitability is structurally weak, burdened by loan impairment charges, the performance of the insurance subsidiaries and declining net interest income. BPM's VR reflects Fitch's opinion of the bank's weak corporate governance where 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 the bank's corporate governance gained momentum with the recent appointment of new supervisory and management boards. Clarity over the bank's future corporate governance and its effectiveness should allow it to raise the necessary capital, estimated at EUR500m. However, it is still too early to assess if the proposed corporate governance reform will be in the necessary direction. 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 VR 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 still lower than 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 - VRs The RWN on Carige's VR reflects Fitch's opinion that the likelihood of the bank failing to achieve the required capital strengthening by end-1H14 remains high. Additionally, the number of Italian banks going to the equity markets to raise fresh capital is increasing. Fitch expects to resolve the RWN after the completion of the capital increase, which the bank expects to take place in June 2014. Should the bank be unable to raise the necessary capital in full or in part, the VR would likely be downgraded to reflect the risks to its standalone viability. Any upgrade of Carige's VR would require evidence of the bank's turnaround, stronger capitalisation, and improving profitability and asset quality. The disposal of the bank's two insurance subsidiaries would be an indicator of the bank's improved risk appetite. The RWN on BPM's VR continues to reflect Fitch's view that uncertainty over the bank's future remains until shareholders reach a clear agreement on how to strengthen the bank's corporate governance effectively and permanently. Failure to reach a durable solution for the bank's corporate governance and to increase capital would result in a downgrade of its VR. The bank's VR could be downgraded by more than one notch, to reflect the increased risks to the bank's viability. Fitch expects to resolve the RWN on BPM's VR once it can assess the proposed changes to the bank's corporate governance. These changes will likely be disclosed ahead of the annual general meeting to approve BPM's 2013 results, which is scheduled for 19 April 2014. BPM's VR would also come under pressure if asset quality deterioration was materially worse than currently expected by Fitch, 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 stabilising asset quality ratios. Should the changes in the bank's corporate governance be merely cosmetic in Fitch's opinion, the sole completion of the capital increase would not be sufficient for the VR to be upgraded. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated notes issued by Carige and BPM are notched down from their respective 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 banks' VR but also to any change in Fitch's view of non-performance or loss severity risk relative to the banks' viability. The rating of BPM's 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. The rating actions are as follows: Banca Carige Long-term IDR: affirmed at 'BB'; Negative Outlook Short-term IDR: affirmed at 'B' Viability Rating: 'b-'; maintained on RWN Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB' Senior unsecured notes: affirmed at 'BB'/'B' Subordinated notes: 'CCC'; maintained on RWN Banca Popolare di Milano Long-term IDR: affirmed at 'BB+'; Outlook Negative Short-term IDR: affirmed at 'B'; Viability Rating: 'bb-'; maintained on RWN Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB+' Senior unsecured notes and EMTN programme: affirmed at 'BB+'/'B' Commercial Paper: affirmed at 'B' Subordinated Lower Tier 2 debt: 'B+'; maintained on RWN 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 (BPM) Manuela Banfi Associate Director +39 02 87 90 87 202 Secondary Analyst (Carige) Fabio Ianno Associate Director +44 20 3530 1232 Committee Chairperson Maria Jose Lockerbie Managing Director +44 20 3530 1083 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 31 January 2014; 'Evaluating Corporate Governance', dated 12 December 2012; 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 31 January 2014, 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 Criteria 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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