November 22, 2017 / 3:29 PM / 24 days ago

Amend: Fitch Upgrades Unipol Banca's Viability Rating to 'b'

(The following statement was released by the rating agency) LONDON, November 22 (Fitch) This commentary replaces the version published on 3 November 2017 to clarify in the first paragraph the sequence of rating actions, in particular that Unipol Banca's Viability Rating (VR) was first downgraded to 'f' before being upgraded to 'b'. Fitch Ratings has downgraded Unipol Banca's VR to 'f' from 'ccc' and then upgraded it to 'b', and affirmed the bank's Long-Term Issuer Default Rating (IDR) at 'BB'. A full list of rating actions is at the end of this rating action commentary. The upgrade follows the EUR900 million recapitalisation of the bank completed in July 2017 and Fitch's expectation that the planned disposal of the entire stock of doubtful loans will be implemented successfully in the coming months. The downgrade of the VR to 'f' before its upgrade to 'b' reflected that the bank had needed an extraordinary capital injection from its parent company to cover the large losses and to increase coverage on its doubtful loans to a level necessary to dispose them and thus restore its viability. For this reason, Fitch views the bank as having failed under its criteria definitions. The subsequent upgrade of the VR reflects Fitch's view of the bank's restored viability following the recapitalisation. KEY RATING DRIVERS IDRS, SUPPORT RATING Unipol Banca's IDRs and Support Rating (SR) reflect institutional support from the bank's ultimate parent company Unipol Group S.p.A. (UG, BBB-/Stable). Unipol Banca's Long-Term IDR is rated two notches below UG's to reflect the parent's support track record to date, Fitch's view that the bank is a potential candidate for sale given its limited strategic relevance for UG and the bank's weak performance track record to date, which necessitated this clean-up transaction to restore the bank's viability and, possibly, make it more attractive to integrate with other players in the banking industry. Fitch sees a moderate probability that the parent will continue to provide support to the bank given regulatory requirements and our view that a default of Unipol Banca would carry high reputational risk for UG as both operate in the same jurisdiction and share the same brand. UG plans to spin off the entirety of Unipol Banca's doubtful loans into a separate NewCo, owned by UG and another UG group company (UnipolSai), and injected EUR900 million of capital in Unipol Banca in July 2017, which Fitch views as further evidence of support. However, at the same time, Fitch takes into account that UG is evaluating strategic options for Unipol Banca following its restructuring, which could include its integration with other domestic banks. Unipol Banca's Stable Outlook is in line with that on UG. VR The upgrade of Unipol Banca's VR reflects Fitch's expectation that the bank will implement a large asset quality clean-up and capital restoration following the capital injection of EUR900 million from its parent in July 2017. At the same time, coverage on impaired loans will improve to average sector levels. However, the VR also reflects the bank's weak operating performance, burdened by a high cost base, still high loan impairment charges (LIC) relative to pre-impairment profit and the bank's business model, which is highly sensitive to the weak operating environment in Italy and low interest rates. Adjusting for the disposal of almost its entire stock of doubtful loans, the impaired loan ratio would decrease to around 10%, as per Unipol Banca's calculations, from a very high 35% and largely be represented by unlikely-to-pay exposures. The additional LIC booked in June 2017 should help the disposal but also help bring coverage levels of impaired loans more in line with peers' at around 49%. The asset quality clean-up resulted in large losses and eroded capital, with the CET1 ratio falling to 0.18% at end-1H17 before being restored to above 15% immediately after through the capital increase of July 2017. The CET1 will then fall to just above 10% once the doubtful loans transfer is completed as Unipol Banca transfers EUR313 million of capital to the NewCo. Equally important, Fitch acknowledges that capital encumbrance-to-unreserved impaired loans will drop materially. Unipol Banca's operating profitability is structurally weak, in Fitch's view, driven by weak revenue generation from the bank's core businesses, high operating costs and still growing LICs. We expect the bank to report material losses in 2017 for the implementation of the restructuring plan, but starting from 2018 Unipol's profitability should benefit from a cleaner balance sheet. Despite this, a more positive assessment of the bank's earnings and profitability would also require evidence that the bank's ability to generate a sustainable level of acceptable revenue and earnings has improved. Unipol Banca's funding and liquidity reflect it being mainly deposit-funded, but these remain vulnerable to depositors' sentiment. The bank's standalone liquidity profile benefits from UG's ability to provide liquidity, which remains important for the bank, in Fitch's opinion. RATING SENSITIVITIES IDRS, SR Unipol Banca's IDRs and SR are sensitive to a change in UG's ability and propensity to support the subsidiary. This means that the bank's ratings and Outlook are primarily sensitive to changes in UG's ratings. The ratings would also be affected by a change in our assessment of UG's propensity to support Unipol Banca. A sale of the bank or a reduction in UG's stake in it would likely diminish the parent's propensity to provide support. VR Unipol Banca's VR reflect Fitch's assumption that the bank will successfully transfer the entirety of its doubtful loans in the coming months. The rating would be downgraded, probably by several notches, if the transaction does not go through. The rating could also be downgraded if the bank fails to turn its profitability around and if impaired loans increase significantly and weigh heavily on its capitalisation. Further VR upgrades, while not likely in the short-term, would require a sustainable return to operating profitability and further improvements in asset quality and capitalisation. The rating actions are as follows: Long-Term IDR: affirmed at 'BB'; Outlook Stable Short-Term IDR: affirmed at 'B' Viability Rating: downgraded to 'f' from 'ccc' and subsequently upgraded to 'b' Support Rating: affirmed at '3' Contact: Primary Analyst Fabio Ianno Director +44 20 3530 1232 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Valeria Pasto Associate Director +39 02 87 90 87 298 Committee Chairperson Cristina Torrella Senior Director +34 933 238 405 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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