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TEXT-S&P cuts Veneto Banca rating to 'BB+/B', outlook is negative
December 20, 2012 / 5:50 PM / in 5 years

TEXT-S&P cuts Veneto Banca rating to 'BB+/B', outlook is negative

     -- We reviewed Veneto Banca's capital strengthening plans in the context 
of the increased economic risk we see in the Italian economy.
     -- In our opinion, Veneto Banca's capital strengthening actions will 
likely not be sufficient to maintain its risk-adjusted capital ratio 
sustainably above 7% over 2013-2014.
     -- We are therefore lowering our long- and short-term ratings on Veneto 
Banca to 'BB+/B' from 'BBB-/A-3' and removing them from CreditWatch negative.
     -- The negative outlook reflects the possibility of a downgrade if we 
were to lower our sovereign ratings on Italy and if we anticipated that Veneto 
Banca's stand-alone credit profile could weaken in the context of 
deteriorating domestic economic and banking industry conditions.

Rating Action
On Dec. 20, 2012, Standard & Poor's Ratings Services lowered its long- and 
short-term counterparty ratings on Italy-based Veneto Banca to 'BB+/B' from 
'BBB-/A-3'. We also lowered our issue rating on Veneto Banca's nondeferrable 
subordinated debt to 'BB-' from 'BB+' and on its Tier 1 preference securities 
to 'B' from 'BB-'. We removed all ratings from CreditWatch where they were 
placed with negative implications on Aug. 5, 2012. The outlook on the 
long-term rating on Veneto Banca is negative.

The downgrade reflects our view that Veneto Banca's capital strengthening 
actions will likely not be sufficient to fully absorb the negative impact of 
the increased economic risk we see in Italy on Veneto Banca's future earnings 
and asset quality. We no longer anticipate that Veneto Banca's risk-adjusted 
capital (RAC) ratio, Standard & Poor's measure of capital, would strengthen to 
a level comfortably above 7% over 2013-2014, from the 5.3% we calculated at 
year-end 2011 (pro forma for increased economic risk in Italy; see "BICRA On 
Italy Maintained At Group '4', Economic Risk Score Revised To '5' On Increased 
Credit Risk For Italian Banks," published Aug. 3, 2012).  As a result, we have 
revised our assessment of Veneto Banca's capital and earning position to 
"moderate" from "adequate." We have consequently revised down our assessment 
of Veneto Banca's stand-alone credit profile (SACP) to 'bb+' from 'bbb-', 
which in turn lead us to lower our ratings on Veneto Banca to 'BB+/B' from 

Our forecast of Veneto Banca's RAC ratio incorporates our view that 
shareholder contributions will continue and that Veneto Banca's risk weighted 
assets, calculated under Standard & Poor's methodology, will likely decrease 
in 2013. Veneto Banca has recently issued EUR350 million worth of convertible 
bonds. According to the published terms, Veneto Banca has the option of 
converting them into Veneto Banca shares from March 2014. In accordance with 
Standard & Poor's bank capital criteria, we do not give credit to convertible 
bonds whose conversion is not mandatory within a given period of time in our 
total adjusted capital (the numerator of the RAC).

In our opinion, Veneto Banca's core earnings capacity will remain modest in 
the current economic environment, as a result of low interest rates, weak 
volume growth, a still high cost base, and potentially rising credit losses. 
In addition, we consider the quality of Veneto Banca's capital as modest, 
taking into account the high share of deferred tax assets related to goodwill 
and provisions, and hybrids we incorporate in our forecast total adjusted 

We have maintained our assessment of Veneto Banca's business position as 
"adequate." This reflects, among other things, our view of the track record 
achieved in terms of integration of the retail banks acquired in past years. 

We assess Veneto Banca's risk position as "moderate" because we believe that 
its vulnerability to credit risk is higher than what is captured by our RAC 
estimates. As in the case of some other Italian banks, we believe the combined 
effect of mounting problem assets and reduced coverage by loan loss reserves 
make Veneto Banca more vulnerable to the impact of higher credit losses, 
particularly in the event of deterioration in the collateral values of assets. 
In our opinion the impact of recession, particularly on the corporate segment 
(which represent over 60% of Veneto Banca's loan book) will likely push Veneto 
Banca's stock of problem assets--which we define as the sum of bad loans 
("sofferenze") and watchlist loans ("incagli")--to high levels in 2013 and 
2014, after experiencing a material increase since the downturn started in 
2009. We calculate Veneto Banca's gross stock of problem assets increased to 
9.8% as of June 2012 compared with 5.1% in 2008. We also take into account 
Veneto Banca's higher exposure to   the real estate and construction sectors 
than the Italian banking sector average. At the same time, Veneto Banca's 
coverage of problem assets through provisioning is low by international 
standards, in our view, and has decreased over the past few years to 29% in 
June 2012 from 33% at year-end 2008. We acknowledge that Veneto Banca's 
provisioning policies rely on extensive use of tangible collateral in its 
assessment of expected losses. Still, our assessment takes into account Veneto 
Banca's large stock of net nonperforming assets (including restructuring loans 
and loans past due), represented about 108% of Veneto Banca's Tier I capital 
as of June 2012. 

Our SACP and ratings on Veneto Banca continue to reflect the anchor of 'bbb' 
we assign to commercial banks operating in Italy (the anchor is our starting 
point for assigning a long-term counterparty credit rating to a bank), 
"average" funding, and "adequate" liquidity, as our criteria define these 

We consider Veneto Banca's to have a "moderate" systemic importance and the 
Italian government to be "supportive" of its banking sector. We evaluate the 
likelihood of government support for Veneto Banca as "moderate" but we do not 
incorporate any uplift into the long-term rating from the SACP, given the 
'BBB+' long-term rating on Italy.

According to our methodology, we rate nondeferrable subordinated debt issued 
by banks in Italy a minimum of two notches below the SACP and the hybrid 
preference securities four notches below the SACP when the SACP is 'bb+' or 
lower. As a result, we also lowered our ratings on Veneto Banca's subordinated 
debt to 'BB-' from 'BB+' and on its Tier 1 preference securities to 'B' from 

The negative outlook on the long-term rating on Veneto Banca reflects the 
possibility that we could lower the ratings if we were to lower our ratings on 
the Republic of Italy (unsolicited BBB+/Negative/A-2), and we anticipated that 
deteriorating economic and banking industry conditions in Italy could affect 
Veneto Banca's asset quality, capital, and earnings more than we currently 
factor into the rating. 

A deterioration of the SACP while the sovereign long-term ratings on Italy 
remained at 'BBB+' would not necessarily trigger a downgrade because such a 
deterioration might be cushioned by government support according to our 

Under our baseline expectations, we still expect the RAC ratio for Veneto 
Banca to remain comfortably above 5% over the next two years, including 
shareholder contributions. We expect Veneto Bancas asset quality will 
continue to deteriorate in 2013, in line with its main peers, although less 
than in 2012. We expect Veneto Banca's credit losses to remain close to our 
forecast Italian domestic average, at 95-100 basis points (bps) in 2012 and 
2013, while maintaining relatively stable loan loss coverage. In addition, our 
rating factors in our view that Veneto Banca will maintain an average funding 
position and adequate liquidity, including a reduction on central bank and 
other short-term funding sources in the medium term. We think that Veneto 
Banca will benefit from its deep retail customer base and continue to further 
reduce its 129% loan-to-retail funding ratio over the next two years, as 
occurred in 2011 and 2012. 

We could lower the ratings if we anticipate that Veneto Banca's RAC ratio will 
not remain sustainably above 5% over the next 24 months, namely if the capital 
strengthening actions don't materialize or as a result of worsening economic 
risk we see in Italy. We could also lower the ratings if we anticipate that 
Veneto Banca's net inflows of NPAs and credit losses will exceed our current 

We could revise the outlook to stable if we anticipated an improvement in 
economic and operating conditions for the Italian banking system, a 
strengthening of Veneto Banca's capital and earning position, and a pronounced 
easing of asset quality deterioration.

Ratings Score Snapshot
Issuer Credit Rating      BB+/Negative/B

SACP                      bb+    
 Anchor                   bbb    
 Business Position        Adequate (0)    
 Capital and Earnings     Moderate (-1)    
 Risk Position            Moderate (-1)    
 Funding and Liquidity    Average and Adequate (0)

Support                   0
 GRE Support              0
 Group Support            0
 Sovereign Support        0

Additional Factors        0

Related Criteria And Research
     -- Banking Industry Country Risk Assessment: Republic of Italy, Nov. 19, 
     -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
     -- Banking Industry Country Risk Assessment Methodology And Assumptions, 
Nov. 9, 2011
     -- Group Rating Methodology And Assumptions, Nov. 9, 2011
     -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
     -- Bank Capital Methodology And Assumptions, Dec. 6, 2010

Ratings List
Downgraded; CreditWatch/Outlook Action
                                   To                 From
Veneto Banca SCPA
 Counterparty Credit Rating        BB+/Negative/B     BBB-/Watch Neg/A-3
 Certificate Of Deposit            BB+/B              BBB-/Watch Neg/A-3
 Senior Unsecured                  BB+                BBB-/Watch Neg
 Subordinated                      BB-                BB+/Watch Neg
 Preferred Stock                   B                  BB-/Watch Neg

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 

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