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April 4 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Mediocredito Trentino Alto Adige S.p.A.’s (MTAA) Long- and Short-term Issuer Default Ratings (IDRs) at ‘BBB+’ and ‘F2’ respectively. The agency has also affirmed the bank’s Viability Rating (VR) at ‘bb-’ and its Support Rating (SR) at ‘2’. The Outlook is Negative.
KEY RATING DRIVERS - IDRS and SR
MTAA’s IDRs and SR are based on Fitch’s expectation that support for MTAA, if needed, will highly likely be provided, on a timely basis, by its main shareholders, the Autonomous Province of Trento (A/Negative/F1), the Autonomous Province of Bolzano (A/Negative/F1) and the Region of Trentino Alto Adige, which jointly hold a 52.5% stake in the bank.
Fitch believes that the public shareholders have the ability to provide sufficient support in funding, liquidity or capital for MTAA, if needed, given their high financial flexibility. This is reflected in their ratings being two notches above Italy’s and the bank’s small balance-sheet size compared with that of its public shareholders.
MTAA’s Long-term IDR is notched two levels down from its main shareholders’ Long-term IDRs to reflect our view of MTAA’s strategic importance given its role in supporting the local economy and the high reputational risk to the majority shareholders should they not support the bank. At the same time, the two-notch rating differential reflects the presence of minority shareholders and its limited integration within its main shareholders, which is the result of MTAA operating as a regulated bank.
The propensity to support is further underpinned by the presence of a shareholders’ pact between the largest shareholders, which Fitch believes will be renewed in its current terms when it expires on 24 April 2014. This pact, albeit not legally binding, includes provisions to provide funds to MTAA if needed. Moreover, the shareholders have provided support in the form of funding in the past, which in the agency’s opinion demonstrates their ability and propensity to promptly intervene, if needed.
MTAA continues to perform an important role for the public sector in its home region. The provinces consider MTAA as a vehicle for executing their economic policies. The bank’s sharp reduction of new loans extended in 2012 and 2013 reflects lower credit demand and tighter underwriting standards but Fitch believes MTAA will remain a key institution for the funding of the local corporate sector’s investments.
MTAA’s franchise and commercial presence also benefit from close links with the local mutual banking sector (Banche di Credito Cooperativo; BCC sector) which holds 36.6% of MTAA’s capital. MTAA provides products and services, typically medium- to longer-term loans, to the BCCs’ clients.
The Negative Outlook mirrors those on the shareholders’ ratings as well as the Negative Outlook on Italy’s sovereign rating.
MTAA’s IDRs and SR are sensitive to changes in Fitch’s assumptions regarding the ability or propensity of its main shareholders to provide support. A downgrade of the provinces would result in a downgrade of MTAA’s IDRs and put pressure on the SR.
The SR and IDRs are also sensitive to a change in the strategic importance of MTAA and would come under pressure if the bank’s ownership structure changes or if we believe that the probability of timely support from its public sector shareholders decreases because of possible state aid considerations. As MTAA operates as a bank in Italy, its IDR is capped at the sovereign rating and is therefore sensitive to a downgrade of Italy.
MTAA’s VR primarily reflects the bank’s weak asset quality and profitability, which Fitch does not expect to improve at least until over the medium term. It also reflects MTAA’s dependence on wholesale funding, partly mitigated by access to liquidity from its shareholders, and tight capitalisation.
MTAA is a small bank that provides long-term lending to the corporate sector. Asset quality has been deteriorating because of the weakness in the economic environment. Although the deterioration slowed down in 2013, gross impaired loans have risen to represent a high 14.8% of gross loans at end-2013. Loan impairment coverage of impaired loans has risen but remains low at about 30%, and renders the bank vulnerable to further falls in asset values. Further loan impairment charges are likely to be put through in 2014.
MTAA’s operating profitability continued to decline in 2013 mainly because of high loan impairment charges. Fitch believes profitability will remain weak in 2014 as improvements in the domestic economy are likely to be gradual. MTAA’s earnings sources are not diversified as medium and long-term lending remains the bank’s main business and net interest income dominates revenues.
The bank relies on wholesale funding, which accounted for about 90% of non-equity funding at end-2013. Fitch believes that its EUR270m of bonds maturing in 2014 could put upward pressure on funding costs.
Fitch expects that the bank’s shareholders would provide ordinary support to underpin liquidity if needed. This could take the form of deposits or purchase of bonds issued by MTAA, directly or through the provinces’ subsidiaries, which include Cassa del Trentino (A/Negative/F1), the financing arm of the Autonomous Province of Trento.
Fitch views the bank’s capitalisation as tight given its small size and weak asset quality, despite reporting a Fitch Core Capital/risk-weighted assets ratio of 15.7% at end-2013.
MTAA’s VR is sensitive to a more rapid deterioration in asset quality than planned, particularly if additional loan impairment charges put further pressure on capital adequacy. A material improvement in asset quality and profitability would result in MTAA’s VR being upgraded.
The VR is also sensitive to changes in the bank’s liquidity. A reduced ability to access funding from the BCC or from its public sector shareholders, materially challenging the bank’s funding structure and costs, would put the VR under pressure.