February 1, 2013 / 5:21 PM / 5 years ago

TEXT - Fitch affirms Banca Monte dei Paschi di Siena

(The following statement was released by the rating agency)

Feb 1 - Fitch Ratings has affirmed Banca Monte dei Paschi di Siena’s (MPS) Long-term Issuer Default Rating (IDR) and Short-term IDR at ‘BBB’ and ‘F3’, respectively. The Outlook on the Long-term IDR is Stable. The bank’s ‘b’ Viability Rating (VR) has been placed on Rating Watch Negative (RWN), while its Support Rating has been affirmed at ‘2’ and the Support Rating Floor (SRF) at ‘BBB’. MPS’s subsidiary Banca Antonveneta’s ratings were also affirmed. A full list of rating actions is at the end of this rating action commentary. RATING ACTION RATIONALE The affirmation of MPS’s IDRs, Support Rating and SRF reflects Fitch’s view that there is a high probability that the Italian authorities will provide continued support to MPS. MPS is Italy’s third-largest banking group with a significant market share in customer deposits and lending. Evidence of support is strong as the authorities are currently supporting the bank through an undertaking to provide about EUR4bn of capital in the form of hybrid instruments. The new hybrid instruments that the bank is expected to issue include an option for the bank for conversion into common shares, which underpins Fitch’s view that the authorities would provide ongoing support to the bank. On 25 January 2013, the bank’s shareholders authorised a capital increase of up to EUR6.5bn, a necessary precondition for the issuance of the new hybrid instruments. Fitch expects the bank to issue the hybrid bonds to the government in February 2013. Around EUR1.9bn of the new capital provided will be used to repay existing government hybrid instruments. MPS’s IDRs are driven by government support and are sensitive to changes in the authorities’ propensity to provide support, which is not currently factored into Fitch’s analysis, or to changes in its ability to do so. The RWN on the bank’s VR reflects Fitch’s opinion that there is a possibility that the bank will have to book further losses, which could be related to increased loan impairment charges given its weak asset quality or additional losses on its securities portfolio. The ‘b’ VR already incorporates Fitch’s expectation that the bank will receive the additional capital from the government, which will provide an additional buffer for losses. The VR also reflects the agency’s view that the bank’s prospects remain weak and that material failure risk is present, in particular in view of sharply deteriorated market confidence. In January 2013, MPS announced a review of its securities portfolio, concentrating on three operations. Following the review, the bank will evaluate whether a restatement of previous years’ financial statements will be necessary. Fitch understands that the bank’s request for an additional EUR500m in capital from the government made in November 2012 should cover the negative impact from these restatements on the bank’s equity that could arise if the bank decided that a restatement was necessary. However, in the agency’s opinion further losses cannot be ruled out. RATING DRIVERS AND SENSITIVITIES - IDRS, SENIOR DEBT, SUPPORT RATING AND SRF MPS’s IDRs and senior debt ratings are based on support from the Italian authorities and are at the bank’s SRF. The Support Rating and the SRF are sensitive to changes in the authorities’ propensity and ability to provide support. The SRF would be revised downwards if the authorities showed signs of a reduced propensity to provide support to MPS, which Fitch currently does not expect. A downgrade of Italy’s sovereign rating would put pressure on the SRF as it would indicate a reduced ability for the authorities to provide support. RATING DRIVERS AND SENSITIVITIES - VR The bank’s VR reflects Fitch’s expectation that MPS’s performance will remain weak given the challenges the bank faces in implementing its business plan in a difficult operating environment. The agency expects the bank’s profitability to remain under pressure, and asset quality is expected to deteriorate further given the ongoing recession in Italy, where Fitch expects real GDP to contract by 0.7% in 2013. The RWN reflects Fitch’s view that losses, in excess of those possible related to the three structured transactions that are reviewed by the bank and that should remain manageable, could result in a downgrade of its VR. These possible losses could arise from further loan impairment charges that might become necessary to strengthen loan impairment allowance coverage of impaired loans, or from other transactions, which the bank currently does not expect. The RWN is also based on Fitch’s opinion that the bank’s already weak performance could suffer further as a result of lost market confidence. Fitch expects to resolve the RWN after the conclusion of the bank’s review of its securities portfolio and after the bank has announced results for 2012, which Fitch expects are likely to include an increase in loan impairment charges given the weak operating environment and to strengthen coverage of existing impaired loans. Thereview of the RWN will also factor in Fitch’s view on whether further progress has been made in the implementation of the bank’s strategic plan necessary to stabilise profitability and on whether there has been any damage to its franchise as a result of reputation risk. Upward pressure on the VR is currently unlikely and would require a stabilisation of the bank’s performance and signs that the implementation of its strategic plan is resulting in a gradual improvement of its profitability and confirmation that there are no further losses arising from the bank’s legacy portfolio. An upgrade would also depend on the bank managing the possible effects of the reputation risk it is exposed to after wide-spread press reports about possible fraudulent activity by previous management on its businesses. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES MPS’s Lower Tier 2 debt is rated one notch below its VR in line with Fitch’s criteria for rating these instruments. The RWN on the debt rating reflects the RWN on the VR. As the rating is notched off the VR, it is sensitive to changes in the bank’s VR. The ratings of the bank’s Upper Tier 2 and Tier 1 instruments and preferred securities reflect Fitch’s view of these notes’ high non-performance risk in the coming years because the receipt of fresh 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. The Upper Tier 2 notes are rated one notch above the Tier 1 instruments to reflect the cumulative coupon on these instruments whereas coupon payments on the Tier 1 instruments is non-cumulative. SUBSIDIARY AND AFFILIATED COMPANY RATING DRIVERS AND SENSITIVITIES Antonveneta is a wholly owned subsidiary of MPS. Its ratings are based on support from its parent and reflect Fitch’s view that Antonveneta forms a core part of the group. Antonveneta’s ratings are sensitive to changes in MPS’s IDRs or to changes in MPS’s propensity to support its subsidiary. Fitch does not expect the propensity to decline given the announced merger of Antonveneta into the parent. The rating actions are as follows: MPS: Long-term IDR: affirmed at ‘BBB’; Outlook Stable Short-term IDR: affirmed at ‘F3’ VR: ‘b’; placed on RWN Support Rating: affirmed at ‘2’ Support Rating Floor: affirmed at ‘BBB’ Debt issuance programme (senior debt): affirmed at ‘BBB’ Senior unsecured debt, including guaranteed notes: affirmed at ‘BBB’ Lower Tier 2 subordinated debt: ‘B-‘; placed on RWN Upper Tier 2 subordinated debt: affirmed at ‘CCC’ Preferred stock and Tier 1 notes: affirmed at ‘CC’ Banca Antonveneta: Long-term IDR: affirmed at ‘BBB’; Outlook Stable Short-term IDR: affirmed at ‘F3’ Support Rating: affirmed at ‘2’ (Caryn Trokie, New York Ratings Unit)

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