December 15, 2017 / 4:45 PM / 2 years ago

Fitch Affirms Intesa Sanpaolo at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 15 (Fitch) Fitch Ratings has affirmed Intesa Sanpaolo S.p.A.'s (IntesaSP) Long-Term Issuer Default Rating (IDR) at 'BBB' and its Viability Rating (VR) at 'bbb'. Fitch has also affirmed subsidiary Banca IMI's Long-Term IDR at 'BBB'. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT IntesaSP's ratings reflect its leading franchises in several market segments in Italy and its diversified business model, which differentiates the bank domestically and has allowed it to generate better and more stable profitability than domestic peers. This balances the bank's weak asset quality. The ratings also factor in IntesaSP's good execution capability, which has allowed higher recoveries on outstanding non-performing loans (NPLs). The bank's improved risk appetite has contributed to lower inflows of new impaired loans since 2007. Capitalisation is satisfactory and maintained with ample buffers over regulatory minimum requirements, although unreserved impaired loans relative to capital as well as its gross impaired loans ratio remain high by global industry averages. The ratings also reflect the group's diversified funding and strong liquidity position. IntesaSP's performance reflects its well-diversified business and strong franchise in Italy, which have supported profitability through low interest rates better than domestic peers. Fitch believes that the bank's predominantly domestic focus leaves its profitability and asset quality correlated with the performance of the Italian economy. We believe that the acquisition of certain activities of two failed banks, Banca Popolare di Vicenza and Veneto Banca, could become a good business fit for IntesaSP's corporate and retail banking franchise and for its asset management activities. Fitch expects the benefits from the integration to materialise from 2018. IntesaSP's asset-quality indicators are improving and compare well with domestic industry averages. However, its gross impaired loans ratio remains very high by international comparison at 13.8% at end-3Q17. The group's improved risk controls and more conservative underwriting standards, combined with a mildly improving economic environment in Italy, have helped reduce inflows of new NPLs, which in 9M17 fell to their lowest level since 2007. In 2017, the bank has followed a more active approach towards reducing impaired loans by means of accelerated recoveries and selective portfolio disposals. IntesaSP's targets a problem loans ratio, as calculated by the bank, of 10.5% by end-2019, which we believe is achievable. Impaired loans were 53% covered at end-3Q17, which we consider is acceptable if the bank continues its strategy of recovering impaired loans rather than selling them. Profitability has been fairly stable over economic cycles, due to business diversification and a retail banking focus, but also given the bank's adequate ability to keep operating efficiency under control. IntesaSP's income generation has benefited from an increasing contribution from commission income. At end-3Q17, net commissions accounted for over 40% of its operating revenue and have been increasingly compensating for the reduced net interest income that has suffered from prolonged low interest rates and strong competition for higher-quality borrowers. Loan impairment charges (LICs) had decreased by over 20% year on year at end-September 2017 because of a gradual improvement in asset quality. However, we expect LICs to remain high in absolute terms to allow IntesaSP to reduce NPLs more rapidly. IntesaSP's Fitch Core Capital (FCC)/risk-weighted assets and regulatory common equity Tier 1 ratios at 13% at end-3Q17 were satisfactorily above minimum requirements. Fitch believes that the bank enjoys stronger capital flexibility than many other Italian banks because of its ability to generate profit and access the capital market. Shareholder remuneration is a cornerstone of IntesaSP's strategy, which has resulted in relatively high dividend pay-outs and in low retained earnings. However, Fitch does not expect the bank to prioritise dividend distribution over capital retention if the latter is needed. Capital encumbrance from unreserved impaired loans remains high at about 66% of FCC at end-3Q17, but the ratio has improved consistently since 2015, and Fitch expects further improvements if the bank continues to execute its NPLs strategy in line with its stated objectives. The group's funding is stable and underpinned by an ample retail customer deposit base. Customer deposits have been resilient through the economic cycle and have grown over the past two years because of IntesaSP's reputation as one of Italy's safest banks. IntesaSP has demonstrated its ability to attract wholesale funding also in times of stress in the domestic banking industry in Italy and is a regular issuer in the domestic and international debt markets. International subsidiaries are largely self-funded. IntesaSP's liquidity is strong and backed by an ample portfolio of unencumbered liquid assets. The bank maintains its regulatory liquidity coverage and net stable funding ratios well above minimum requirements. IntesaSP's 'F2' Short-Term IDR, the higher of the two possibilities for a 'BBB' Long-Term IDR under our criteria, reflects the bank's good funding and liquidity and our view that short-term liquidity is supported by access to central bank facilities. The ratings of the senior debt issued by IntesaSP's funding vehicles, Intesa Sanpaolo Bank Ireland, Intesa Sanpaolo Bank Luxembourg, S.A. and Intesa Funding LLC, are equalised with that of the parent because the debt is unconditionally and irrevocably guaranteed by IntesaSP and Fitch expects the parent to honour this guarantee. SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating and the Support Rating Floor reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign if a bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that requires senior creditors to participate in losses, if necessary, instead of, or ahead of, a bank receiving sovereign support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital securities issued by IntesaSP are notched down from the VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. Tier 2 subordinated debt is rated one notch below the VR for loss severity to reflect our expectation of below-average recovery prospects. No notching is applied for incremental non-performance risk because write-down of the notes will only occur once the point of non-viability is reached and there is no coupon flexibility before non-viability. The legacy Upper Tier 2 debt rating reflects its higher loss severity given its subordination to senior unsecured and subordinated Tier 2 obligations (two notches) and incremental non-performance risk (one notch) for its cumulative coupon deferral subject to constraints. Legacy Tier 1 notes are notched four times from the VR, two notches for loss severity for deep subordination and another two for non-performance risk as coupon deferral is constrained by look-back clauses. Additional Tier 1 notes are rated five notches below the VR, two notches for loss severity relative to senior unsecured creditors and three notches for incremental non-performance risk, the latter notching reflecting the instruments' fully discretionary interest payment. SUBSIDIARY AND AFFILIATED COMPANY The ratings of IntesaSP's Italian subsidiary Banca IMI are based on institutional support from its parent and reflect Fitch's view of its core function and extremely high integration within the group. DCRs IntesaSP and Banca IMI's DCRs are at the same level as their Long-Term IDRs because in Italy derivative counterparties have no preferential legal status over other senior obligations in a resolution. SENIOR STATE-GUARANTEED SECURITIES The long-term rating of the state-guaranteed debt, which was transferred to IntesaSP upon the acquisition of certain activities of Banca Popolare di Vicenza's and Veneto Banca's, is based on Italy's direct, unconditional and irrevocable guarantee for the issues, which covers payments of both principal and interest. Italy's guarantee was issued by the Ministry of Economy and Finance under Law Decree 23 December 2016, n. 237, subsequently converted into law 15/2017. The ratings reflect Fitch's expectation that Italy will honour the guarantee provided to the noteholders in a full and timely manner. The state guarantee ranks pari passu with Italy's other unsecured and unguaranteed senior obligations. As a result, the notes' long-term ratings are in line with Italy's 'BBB' Long-Term IDR. RATING SENSITIVITIES IDRS, VR, SENIOR DEBT and DCR IntesaSP's ratings are primarily sensitive to deterioration in the operating environment in Italy as this would affect asset quality, earnings and capitalisation. IntesaSP's ratings are likely to be downgraded if the bank does not meet its targets to reduce impaired loans or if its capital remains highly exposed to unreserved impaired loans. Similarly, deterioration in the bank's funding and liquidity would put pressure on the ratings. Rating upside is, in Fitch's opinion, limited and is likely to require an upgrade of Italy's sovereign rating. However, over the longer term IntesaSP's ratings could benefit from sustained improvements in the economic conditions in Italy and evidence of materially stronger asset quality combined with consistent profitability and sound capital levels. IntesaSP's Short-Term IDR would be downgraded if its funding and liquidity weaken. The ratings of the senior debt issued by Intesa Sanpaolo Bank Ireland, Intesa Sanpaolo Bank Luxembourg, S.A. and Intesa Funding LLC are sensitive to the same factors that affect the senior unsecured debt issued by the parent. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the Support Rating and upward revision of the Support Rating Floors would be contingent on a positive change in the sovereign's propensity to support the banks. In Fitch's view, this is highly unlikely, although not impossible. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated debt and hybrid securities' ratings are primarily sensitive to changes in the VR, from which they are notched. The ratings are also sensitive to a change in the notes' notching, which could arise if Fitch changes its assessment of their non-performance relative to the risk captured in the VRs or their expected loss severity. For additional Tier 1 issues, this could reflect a change in capital management or flexibility, or an unexpected shift in regulatory buffers and requirements, for example. SUBSIDIARY AND AFFILIATED COMPANIES (IDR and DCR) As Banca IMI's ratings are based on its parent's Long-Term IDR, they are sensitive to changes in IntesaSP's propensity to provide support and to changes in the parent's Long-Term IDR. SENIOR STATE-GUARANTEED SECURITIES The notes' ratings are sensitive to changes in Italy's Long-Term IDR. If IntesaSP decides to cancel the guarantees on this senior debt, Fitch will no longer rate the notes based on the guarantee but might assign ratings based on IntesaSP's senior debt rating. The rating actions are as follows: Intesa Sanpaolo S.p.A. Long-Term IDR: affirmed at 'BBB'; Outlook Stable Short-Term IDR: affirmed at 'F2' Viability Rating: affirmed at 'bbb' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: affirmed at 'BBB(dcr)' Senior debt (including debt issuance programmes): affirmed at 'BBB'/ 'F2' Commercial paper/certificate of deposit programmes: affirmed at 'F2' Short-term deposits affirmed at 'F2' Senior market-linked notes: affirmed at 'BBBemr' Subordinated lower Tier II debt: affirmed at 'BBB-' Subordinated upper Tier II debt: affirmed at 'BB' Tier 1 instruments: affirmed at 'BB-' AT1 notes: affirmed at 'B+' State-guaranteed debt: affirmed at 'BBB' Banca IMI S.p.A.: Long-Term IDR: affirmed at 'BBB'; Outlook Stable Short-Term IDR: affirmed at 'F2' Support Rating: affirmed at '2' Derivative Counterparty Rating: assigned at 'BBB(dcr)' Senior debt (including programme ratings): affirmed at 'BBB' Senior market-linked notes: affirmed at 'BBBemr' Intesa Sanpaolo Bank Ireland plc: Commercial paper/short-term debt affirmed at 'F2' Senior unsecured debt: affirmed at 'BBB' Senior market-linked notes: affirmed at 'BBBemr' Intesa Sanpaolo Bank Luxembourg, S.A.: Commercial paper/short-term debt: affirmed at 'F2' Senior unsecured debt: affirmed at 'BBB' Intesa Funding LLC: US commercial paper programme: affirmed at 'F2 Contact: Primary Analyst Francesca Vasciminno Senior Director +39 02 87 90 87 225 Fitch Italia S.p.A. 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