Fitch Affirms BPM's IDR at 'BB+'/Negative; Downgrades VR to 'b+'

Thu Apr 17, 2014 12:25pm EDT

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(The following statement was released by the rating agency) LONDON/WARSAW/MILAN, April 17 (Fitch) Fitch Ratings has affirmed Banca Popolare di Milano's (BPM) Long-term Issuer Default Rating (IDR) at 'BB+' with Negative Outlook. It has also downgraded its Viability Rating (VR) to 'b+' from 'bb-' and removed it from Rating Watch Negative (RWN). A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS - IDRs, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT Banca Popolare di Milano's Long-and Short-term IDRs and senior debt ratings are driven by its Support Rating Floor (SRF). BPM's Support Rating (SR) and SRF reflect the regional importance of the bank to Italy and Fitch's view that there is a moderate probability that the authorities would provide support to the bank if required because of BPM's strong franchise in its home region of Lombardy and its fairly large customer funding base. RATING SENSITIVITIES - IDRs, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT The ratings are sensitive to a weakening of Fitch's assumptions around the ability or propensity of Italy to provide timely support to the bank. Of these, the greatest sensitivity is to a weakening of support propensity in respect of further progress being made in addressing practical and legislative impediments to effective bank resolution. We believe this will mainly occur through national implementation of the requirements of the Bank Recovery and Resolution Directive (BRRD). We also believe banking union will reduce national influence over resolution decisions. Our current base case is that BPM's SR and SRF are likely to be downgraded and revised downwards, respectively to '5' and 'No Floor' over the next one to two years. At this stage, this is likely to be in 2H14 or in 1H15, but this could change. The timing will be influenced by Fitch's continuing analysis of progress made on bank resolution and could also be influenced by idiosyncratic events. The Outlook is Negative because such a downward revision of SRF is likely to result in downgrades of the Long-term IDR and long-term senior debt ratings to the level of the bank's VR, unless mitigating factors arise in the meantime. Mitigating factors could include an upgrade of BPM's VR to the level of the bank's current SRF, the existence of large buffers of junior debt or corporate actions. The Outlook is also Negative because it is in line with the Outlook on Italy's 'BBB+' Long-term IDR and reflects the 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 the BPM's SRF and ultimately also its Long-term IDR. KEY RATING DRIVERS - VR The downgrade of the VR reflects the halted reform process, for the second time, of the bank's corporate governance after its rejection by the bank's EGM on 12 April 2014. As a result, BPM's VR reflects Fitch's opinion of the bank's weak corporate governance, which acts as a constraint on the ratings. In 2013, the bank's previous management and supervisory boards had attempted to reform the bank's corporate governance but failed to do so in the absence of shareholders' consensus. This further rejection, in Fitch's opinion, points to the difficulty of improving BPM's weak and convoluted corporate governance. BPM announced its intention to resume the process of reforming its corporate governance after the completion of the capital increase; however, the timescale is currently uncertain.. The downgrade is limited to only one notch as Fitch expects the bank to be successful in raising the necessary capital to strengthen its balance sheet. The planned new share issue of EUR500m, which is underwritten by a syndicate of banks, will strengthen the bank's regulatory Basel 2.5 Core Tier 1 ratio by 150bps to 8.7%. This new level of Core T1 will compare adequately with its direct domestic peers and put the bank in a stronger position ahead of the asset quality review undertaken by the European Central Bank. Capital may increase further if the additional risk weightings currently imposed by the Italian regulator are removed and if the bank's internal credit risk models are validated. Even excluding the benefit that may arise from the removal of the additional risk weightings and internal capital generation, management has some further moderate flexibility to strengthen capitalisation, if needed, in the form of capital gains, assets disposals and recourse to additional tier 1 capital instruments. BPM's operating performance improved in 2013, aided by contained loan impairment charges and better efficiency, which allowed the bank to report a EUR96m operating profit. The pace of asset quality deterioration at BPM was in line with sector trends. However, BPM's impaired loans ratio of 12.2% at end-2013 still compared favorably with most of its peers' and was below the sector's average. Coverage levels are acceptable, but Fitch expects loan impairment charges to remain high. Above-average exposure to the real estate and construction sectors weakens BPM's credit risk profile. RATING SENSITIVITIES - VR As the bank's weak corporate governance is the factor constraining the VR, any upgrade of BPM's VR would be contingent on a credible strengthening of its corporate governance standards. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated Lower Tier 2 notes issued by BPM are notched down from its VR in accordance with Fitch's assessment of the instruments' respective non-performance and relative loss severity risk profiles. Their ratings are primarily sensitive to any change in the bank's VR but also to any change to Fitch's view of non-performance or loss severity risk relative to the bank's viability. The preferred stock and hybrid capital instruments issued by BPM are notched down from its VR in accordance with Fitch's methodologies and are sensitive to changes to the bank's VR. The rating actions are as follows: Banca Popolare di Milano Long-term IDR: affirmed at 'BB+'; Outlook Negative Short-term IDR: affirmed at 'B'; Viability Rating: downgraded to 'b+' from 'bb-'; off 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: 'downgraded to 'B' from B+'; off RWN Preferred stock and hybrid capital instrument: affirmed at 'CCC' Contact: Primary Analyst Francesca Vasciminno Senior Director +39 02 87 90 87 225 Fitch Italia S.p.A. Via Privata Maria Teresa, 8 20121 Milan Secondary Analyst Manuela Banfi Associate Director +39 02 87 90 87 202 Committee Chairperson Artur Szeski Senior Director +48 22 338 6292 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, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating 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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