May 13, 2014 / 4:21 PM / in 4 years

Fitch Affirms Five Large Italian Banks

(The following statement was released by the rating agency) MILAN/LONDON, May 13 (Fitch) Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of Banca Monte dei Paschi di Siena (MPS), Banca Nazionale del Lavoro (BNL), Intesa Sanpaolo (IntesaSP), UBI Banca (UBI) and UniCredit. The Outlooks on BNL's and IntesaSP's Long-term IDRs have been revised to Stable from Negative. The Outlooks on the Long-term IDRs of MPS, UBI and UniCredit are Negative. The affirmations follow a periodic review of the five banking groups. A full list of rating actions is at the end of this rating action commentary. MPS KEY RATING DRIVERS - IDRs, SENIOR DEBT, SR AND SRF MPS's Long-term IDR is at its Support Rating Floor (SRF) and is currently based on Fitch's expectation that support would be highly likely to be provided from the Italian authorities, should it be required. This is because of MPS's systemic importance domestically and the amount of government hybrid capital received to date. RATING SENSITIVITIES - IDRs, SENIOR DEBT MPS's IDRs are driven by the bank's SRF. As a result, 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. The Negative Outlook reflects that a downward revision of the SRF would result in downgrades of the IDRs and senior debt ratings to the level of the bank's Viability Rating (VR), unless mitigating factors arise in the meantime. These could include an upgrade of MPS's VR to the level of the bank's current SRF, the existence of large buffers of junior debt or corporate actions. KEY RATING DRIVERS - VR MPS's 'ccc' VR reflects the bank's weak capitalisation in the absence of the government hybrid capital received. It also considers a possible full or partial nationalisation of the bank, despite this possibility having become more unlikely since the last review of MPS's ratings in November 2013, given the recently improved investor preference towards Italian banks, including MPS. A number of international institutional shareholders recently acquired sizeable minority stakes in the bank and Fitch expects them to take part in MPS's imminent capital increase and retain their stakes in the medium term. MPS's VR also reflects its weak profitability and asset quality. MPS reported a EUR1.4bn net loss for 2013, which included nearly EUR3.2bn loan impairment charges and a net loss of EUR174m for 1Q14. Asset quality is weak with a gross impaired loans/total loans ratio equal to a high 21.5% at end-2013. MPS's end-2013 Fitch Core Capital (FCC) ratio, which excludes government hybrid capital, was weak at around 5%. Fitch eligible capital (FEC), which includes the EUR4.1bn government hybrid capital received, was 10.4% at end-2013, which Fitch considers low given the high volume of unreserved impaired loans. More positively, in 1Q14 MPS returned to the public institutional market for the first time since September 2012 with a EUR1bn senior unsecured issuance. RATING SENSITIVITIES - VR Fitch expects to review MPS's ratings after it achieves its planned capital increase, currently expected to take place in June 2014. The capital increase could total EUR5bn, if it is agreed by its EGM in late May. So far, the bank received approval from its EGM (in late December 2013) to raise up to EUR3bn. The bank has entered into a pre-underwriting agreement to ensure the success of the capital increase. The resources raised through the transaction would allow the bank to partly repay the government hybrid capital and maintain a cushion to absorb any additional capital requirement that might result from the European Central Bank (ECB) transparency exercise. The bank estimates its fully-loaded Basel 3 CET1 (FLB3) ratio based on end-2013 numbers is 11.3%. MPS's VR is primarily sensitive to the success of its announced capital increase of EUR5bn. The successful completion of the planned capital increase would make it possible for the bank's VR to be upgraded. Should the new capital not be raised, the government hybrid capital would likely be converted into common shares, which would mean that the Italian state would own a significant stake in MPS. However, an unexpected need of additional government support to avoid a failure would indicate the bank's non-viability and MPS's VR would likely be downgraded to 'f'. Fitch considers this scenario currently less likely given the recently improved investor sentiment towards the bank. IntesaSP KEY RATING DRIVERS - IDRS, SENIOR DEBT AND VR IntesaSP's IDRs are based on its VR and reflect its sound capitalisation, solid funding in the current market context, and its leading domestic franchise, which generated resilient pre-impairment operating profits throughout the crisis. According to Fitch's reclassifications, the bank posted a small operating loss in 2013 driven by over EUR7bn loan impairment charges. The significant charges reflect the bank's effort to strengthen cash coverage against impaired exposures ahead of the ECB's asset quality review this year and to be prepared for any economic recovery. However, IntesaSP's operating profitability has been more resilient than many of its domestic peers throughout the crisis, despite the difficulties all Italian banks have in making their domestic commercial activities sufficiently profitable. IntesaSP's VR is underpinned by its sound capitalisation with a core Tier 1 ratio and a FLB3 ratio of 11.3% and 12.3%, respectively, which compares well with international peers. Liquidity has also remained sound, stable and conservatively managed during 2013. The bank's funding sources are adequately diversified. The bank estimated a Basel III NSFR and LCR well above regulatory minimum at end-2013. IntesaSP's capability to issue securities in the wholesale market has remained strong to date while central bank funding utilisation decreased over 2013 and by year-end was entirely in the form of main refinancing operations. RATING SENSITIVITIES - IDRS, SENIOR DEBT AND VR IntesaSP's IDR is sensitive to movements in its VR. The revision of its Outlook to Stable from Negative reflects the rating action on Italy's sovereign rating (see 'Fitch Revises Italy's Outlook to Stable, Affirms at 'BBB+' dated 25 April 2014 at www.fitchratings.com.). Fitch considers IntesaSP's credit profile to be closely linked to the sovereign's and the operating environment in Italy, where the bulk of the group's operations are located. As a result IntesaSP would be sensitive to a downgrade of the sovereign rating, which would result in a downgrade of the bank's VR and Long-term IDR, although given the Stable Outlook, this is currently unlikely. Fitch expects the bank's profitability and asset quality to stabilise throughout 2014. Any material erosion of the bank's capitalisation, could lead to a downgrade of its VR. Similarly, any significant unexpected deterioration in liquidity could result in a downgrade. UBI KEY RATING DRIVERS - IDRS, SENIOR DEBT AND VR UBI's IDRs are based on its VR and reflect its sound capitalisation, stable funding and liquidity, impaired loans that are lower than peers and sound franchise. The ratings also reflect continued pressure on operating profitability and asset quality deterioration. UBI's FCC ratio of 12.8% at end-2013 and its estimated FLB3 ratio of above 10% indicate a comfortable capital position. UBI's impaired loans have risen materially over the past four years but remain better than the average in Italy, reflecting its operations in wealthy northern Italy and its adequate underwriting policies. Gross impaired loans reached a high 11.6% of gross loans at end-2013, largely originating from corporate and SME exposures. The relatively low coverage of impaired loans reflects the group's lending composition, predominantly long-term loans backed by collateral, low loan-to-value ratios and the bank's more active write-off practices. However, exposure to material decreases in collateral values is a risk. UBI's operating profitability remains under pressure, having reported a weak operating ROAE of 1.25% in 2013. Profitability is dampened by low net interest income resulting from low interest rates, weak lending volumes, and the bank's difficulties in repricing its lending given the structure of its portfolio, which is primarily long term. UBI's efficiency has improved, mainly due to headcount reductions. RATING SENSITIVITIES - IDRs, SENIOR DEBT AND VR UBI's Long-term IDR is based on its VR, and therefore a downgrade of its VR would result in a downgrade of its Long-term IDR. The Outlook on its Long-term IDR is Negative as Fitch expects that unless earnings and asset quality improve significantly, the Long-term IDR could be downgraded. The bank's ratings could also come under pressure if capital was eroded by material losses or acquisitions, events that are currently not factored into the ratings. UBI's IDR is at the same level as the sovereign. A downgrade of the sovereign would likely result in a downgrade of UBI's VR and IDRs as Fitch considers the bank's credit profile closely linked to the sovereign's and to the operating environment in Italy. UniCredit KEY RATING DRIVERS - VR, IDRs AND SENIOR DEBT UniCredit's IDRs are based on its VR and are underpinned by its broad international franchise, diversified funding profile, still acceptable capitalisation even after the reported loss of nearly EUR14bn for 2013 and plans to operate with an adequate 10% FLB3 ratio in the long term. The VR takes into account UniCredit's underperforming Italian franchise, exposure to developing countries where political risk is relevant and volatility has recently increased, below-average asset quality, particularly in Italy, as well as significantly reduced underlying credit quality risks as the bank was more rigorous than many peers in increasing provisions for its problem exposures. Strongly increased coverage ratios of impaired loans have reduced the group's vulnerability to collateral values and the bank is actively managing its impaired loans exposure. The VR also takes into account the challenges facing the bank's pan-European business model in light of increasing regulatory scrutiny of cross-border funding and capital flows. RATING SENSITIVITIES - VR, IDRs, AND SENIOR DEBT The Negative Outlook on UniCredit's IDR reflects the challenges the bank faces in improving its profitability, notably in its Italian home market. The bank's IDRs and VR are sensitive to a change in Fitch's assumptions around the development of UniCredit's profitability and asset quality, notably in Italy. Fitch expects LICs to have peaked in 2013. UniCredit's IDRs and VR are sensitive to Fitch's assumptions regarding the risk profile and profitability of its significant foreign operations, which to date have been supportive of the ratings given the weak operating environment in Italy. These foreign subsidiaries have shown significant dividend payment potential and sound internal capital generation. However, for some, the local operating environment has recently become more volatile. Progress towards banking union in the eurozone, ensuring improved capital and funding fungibility, is supportive of UniCredit's VR. As a result of its international diversification, UniCredit's risk profile is somewhat less correlated with the sovereign's risk profile than its domestic peers. Depending on the interplay between domestic performance and benefits from its international presence, UniCredit could potentially be rated one notch above Italy's sovereign. However, at the moment, the weakness of its Italian operations and the heightened volatility at some of its larger international operations, notably Russia and Turkey, means that the Outlook on UniCredit's IDR remains Negative. A return to sustainable profitability for the group and for its Italian operations, given their importance to UniCredit's business model, would be necessary for the Outlook to be revised to Stable. Conversely, should the risk profile and notably the profitability of the bank's activities in Germany (UniCredit Bank AG, which consolidated much of UniCredit's corporate and investment banking, A+/Negative/a-), Austria and CEE (UniCredit Bank Austria AG, which consolidates UniCredit's CEE activities except Poland; A/Negative/bbb+) and Poland (Bank Pekao SA; A-/Stable/a-) worsen, this could be negative for UniCredit's ratings. KEY RATING DRIVERS AND RATING SENSITIVITIES -SUPPORT RATINGS AND SRFs - INTESASP, UNICREDIT, UBI BANCA AND MPS. The 'BBB' SRFs of IntesaSp, UniCredit, UBI Banca and MPS reflect Fitch's opinion that the Italian authorities show a high propensity to support the country's largest banks given their domestic systemic importance. The ratings are sensitive to a weakening in Fitch's assumptions around either the ability or propensity of Italy to provide timely support. Of these, the greatest sensitivity is to a weakening of support propensity in respect of further progress being made in addressing both the legislative and the practical impediments to effective bank resolution. In the EU, where the extent of existing legislative powers and the practical complexity of applying resolution tools vary by country, this will mainly occur through national implementation of the provisions of the Bank Recovery and Resolution Directive. In Banking Union countries, including Italy, the Single Supervisory Mechanism will reduce national influence over supervision and licensing decisions in favour of the ECB. While still involving multiple parties in resolution decisions, the SRM will also result in a dilution of national influence over resolution decisions. Overall, Fitch's base case is that sufficient progress is likely to have been made for large Italian banks' SRs to be downgraded to '5' and SRFs to be revised downwards to 'No Floor' within the next one to two years. At this stage, this is likely to be later in 2014 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 Italian state's ability to provide timely support to the banks is dependent upon its creditworthiness, reflected in its Long-term IDR of 'BBB+' with a Stable Outlook. 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 large Italian banks' SRFs. BNL KEY RATING DRIVERS - IDRs, SENIOR DEBT AND SR BNL's IDRs and Support Rating (SR) reflect institutional support from its parent, BNP Paribas (A+/Stable). Fitch considers BNL as core to BNP Paribas' strategy as Italy remains a home market for the French group. BNL's IDRs and SR are also capped at one notch above Italy's sovereign rating, in line with Fitch's criteria for "Rating Financial Institutions Above the Sovereign". This reflects the agency's view that BNP Paribas' propensity and ability to support BNL is linked to the operating environment in Italy. RATING SENSITIVITIES - IDRs SENIOR DEBT and SR BNL's IDRs and SR are sensitive to changes in BNP Paribas' ability and propensity to provide support to its subsidiary, and to changes in Italy's sovereign rating. The revision of the Outlook to Stable from Negative reflects the rating action on Italy's sovereign rating. BNP Paribas' ability to support BNL is indicated by its Long-term IDRs. A downgrade of BNP Paribas' IDRs would only affect BNL's IDRs and SR if the parent's Long-term IDR was downgraded by more than two notches as BNL's Long-term IDR is currently constrained by Italy's sovereign rating. A reduction in BNL's strategic importance for its parent, which Fitch currently does not expect, would also place the IDRs and SR under pressure. BNL's Short-term IDR would come under pressure if there were signs of weakening short-term liquidity support from its parent, which Fitch currently does not expect. Given the current notching Fitch applies between BNL's IDR and Italy's sovereign rating, BNL's IDRs and SR would also be sensitive to a downgrade of Italy's rating. KEY RATING DRIVERS - VR BNL's 'bbb-' VR reflects BNL's only acceptable capitalisation with an FCC/RWA ratio of 8.3% at end-2013, in the context of a high impaired loan ratio and weakened performance. Despite the sale of a significant stock of doubtful loans to the parent bank in 1H13, BNL's gross impaired loan ratio remained high at nearly 14% at end-2013, and Fitch expects some further deterioration throughout 2014. BNL's liquidity, which benefits from ordinary support from its parent, remains sound and market risk exposure is low. RATING SENSITIVITIES - VR BNP Paribas has committed to keeping BNL well capitalised. However, BNL's VR would come under pressure if losses at the bank materially eroded capitalisation and BNP Paribas' capitalisation targets were not met. BNL's VR would also come under pressure if the increase in impaired loans accelerates more than currently expected in the coming quarters or if the bank does not maintain its adequate loan impairment allowance coverage of impaired loans (doubtful and watchlist loans), which stood at 53.8% at end-2013 and compared well with peers. Fitch considers an upgrade of BNL's VR unlikely in the near future. It would require an improvement in capitalisation and operating profitability, which would require a material improvement in the bank's operating environment. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES (ALL BANKS) Subordinated debt and other hybrid capital issued by the banks are all notched down from their VRs, or from the VR of their parent if the issuer has no VR, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in the VRs, which drive the ratings. The ratings of MPS's Upper Tier 2 and Tier 1 instruments and preferred securities reflect Fitch's opinion that non-performance risk in the form of non-payment of coupons is high. The receipt of state aid means that if it reports a net loss, MPS will be obliged not to make coupon payments where the terms of the instruments allow for non-payment. SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS AND SENSITIVITIES IntesaSP's Italian subsidiaries' ratings, Banca IMI and Cassa di Risparmio di Firenze, reflect Fitch's view of the core function of these subsidiaries in the group. As their ratings are based on their parent's Long-term IDR, they are sensitive to changes in IntesaSP's propensity to provide support, which Fitch does not expect, and to changes in the parent's Long-term IDR. UniCredit's and IntesaSP's foreign subsidiaries are not affected by this rating action. The rating actions are as follows: MPS: Long-term IDR: affirmed at 'BBB'; Outlook Negative Short-term IDR: affirmed at 'F3' VR: affirmed at 'ccc' SR: affirmed at '2' SRF: affirmed at 'BBB' Debt issuance programme (senior debt): affirmed at 'BBB' Senior unsecured debt: affirmed at 'BBB' State Guaranteed Notes (IT0004804362): affirmed at 'BBB+' Lower Tier 2 subordinated debt: affirmed at 'CC' Upper Tier 2 subordinated debt: affirmed at 'C' Preferred stock and Tier 1 notes: affirmed at 'C' BNL: Long-term IDR: affirmed at 'A-'; Outlook revised to Stable from Negative Short-term IDR: affirmed at 'F1' VR: affirmed at 'bbb-' SR: affirmed at '1' Senior debt: affirmed at 'A-' IntesaSP Long-term IDR: affirmed at 'BBB+'; Outlook revised to Stable from Negative Short-term IDR: affirmed at 'F2' VR: affirmed at 'bbb+' SR: affirmed at '2' SRF: affirmed at 'BBB' Senior debt (including debt issuance programmes and guaranteed notes): Long-term rating affirmed at 'BBB+'; Short-term rating affirmed at 'F2' Commercial paper/certificate of deposit programmes: affirmed at 'F2' Senior market-linked notes: affirmed at 'BBB+emr' Subordinated lower Tier II debt: affirmed at 'BBB' Subordinated upper Tier II debt: affirmed at 'BB+' Tier 1 instruments: affirmed at 'BB' Cassa di Risparmio di Firenze: Long-term IDR: affirmed at 'BBB+'; Outlook revised to Stable from Negative Short-term IDR: affirmed at 'F2' SR: affirmed at '2' Senior debt (including programme ratings): affirmed at 'BBB+' Banca IMI S.p.A.: Long-term IDR: affirmed at 'BBB+'; Outlook revised to Stable from Negative Short-term IDR: affirmed at 'F2' SR: affirmed at '2' Senior debt (including programme ratings): affirmed at 'BBB+' Intesa Sanpaolo Bank Ireland plc (no issuer ratings assigned): Commercial Paper/Short-term debt affirmed at 'F2' Senior unsecured debt (guaranteed by Intesa Sanpaolo, including programme ratings): affirmed at 'BBB+' Societe Europeenne de Banque SA (no issuer ratings assigned): Commercial Paper and Short-term debt (guaranteed by Intesa Sanpaolo): affirmed at 'F2' Senior unsecured debt (guaranteed by Intesa Sanpaolo): affirmed at 'BBB+' Intesa Funding LLC (no issuer ratings assigned): US Commercial Paper Programme: affirmed at 'F2' UBI: Long-term IDR: affirmed at 'BBB+'; Outlook Negative Short-term IDR: affirmed at 'F2' VR: affirmed at 'bbb+' SR: affirmed at '2' SRF: affirmed at 'BBB' Senior debt (including programme ratings): affirmed at 'BBB+' UBI Banca International S.A. (no issuer ratings assigned): Commercial paper/certificate of deposit programmes: affirmed at 'F2' UniCredit S.p.A.: Long Term IDR: affirmed at 'BBB+'; Outlook Negative Short Term IDR: affirmed at 'F2' VR: affirmed at 'bbb+' SR: affirmed at '2' SRF: affirmed at 'BBB' Senior unsecured debt: affirmed at 'BBB+' Guaranteed senior unsecured notes: affirmed at 'BBB+' Market-linked notes: affirmed at 'BBB+emr' Lower Tier 2 notes: affirmed at 'BBB' Upper Tier 2 notes: affirmed at 'BB+' Preferred stock: affirmed at 'BB' Additional Tier 1 Capital Notes: affirmed at 'BB-' UniCredit Bank (Ireland) p.l.c. (no issuer ratings assigned): Senior unsecured notes: affirmed at 'BBB+'/F2 Guaranteed senior unsecured notes: affirmed at 'BBB+' UniCredit International Bank (Luxembourg) S.A. (no issuer ratings assigned): Guaranteed senior unsecured notes: affirmed at 'BBB+' Contact: Primary Analyst (IntesaSP, UniCredit, UBI, MPS) Francesca Vasciminno Senior Director +39 02 87 90 87 225 Fitch Italia S.p.A. Via Privata Maria Teresa, 8 20123 Milan Primary Analyst (BNL) Christian Scarafia Senior Director +44 20 3530 1012 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst (BNL, MPS) Fabio Ianno Associate Director +44 20 3530 1232 Secondary Analyst (UniCredit, UBI) Manuela Banfi Associate Director +39 02 879087 202 Secondary Analyst (IntesaSP) Alessandro Musto Associate Director +39 02 879087 201 Committee Chairperson Claudia Nelson Senior Director +44 20 3530 1191 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on 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, Rating FI Subsidiaries and Holding Companies, dated 10 August 2012, 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 Rating FI Subsidiaries and Holding Companies 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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