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Rating Action:

Moody's affirms Credito Valtellinese S.p.A.'s Ba3 deposit rating; outlook positive

23 Mar 2018

Senior unsecured MTN affirmed at (P)B2

London, 23 March 2018 -- Moody's Investors Service today affirmed Credito Valtellinese Sp.A.'s (CreVal) Ba3 long-term deposit rating and (P)B2 long-term senior unsecured MTN and upgraded the bank's standalone baseline credit assessment (BCA) and adjusted BCA to b2 from caa1 as well as the long-term Counterparty Risk Assessment (CR Assessment) to Ba2(cr) from Ba3(cr). The outlook on the long-term deposit rating was changed to positive from developing.

The rating action reflects (i) CreVal's recapitalisation and planned problem loan reduction; (ii) higher loss-given-failure for the bank's junior deposits and senior unsecured bonds; and (iii) Moody's view that the likelihood of government support is now low following the bank's restructuring.

A list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR UPGRADING THE BCA

In Moody's view, the share issue and planned problem loan reduction improve the bank's standalone creditworthiness, leading to a two-notch upgrade in the BCA to b2. Nevertheless, Moody's believes that it will be challenging for CreVal to restore an adequate profitability and this factor is a weakness for the bank's standalone creditworthiness.

On 20 March, the bank completed a €700 million share issue which, together with ongoing asset disposals, will raise about €800 million of capital. The proceeds will largely be used to write down and then dispose of €2.1 billion of problem loans, €1.6 billion of which under a securitisation with the senior tranche guaranteed by the government under a scheme known as GACS, by end-2018.

CreVal expects to report a strengthened fully-loaded Common Equity Tier 1 ratio (CET1) of 11% by end-2018, compared to its transitional Tier 1 working minimum requirement of 9.9% for 2018, and a halving of its gross problem loan ratio to 10.5% by end-2018 (from 22% at end-2017). This marks a significant improvement in the bank's solvency, which was previously very weak.

Moody's does not however factor into the BCA the full benefit of the profitability improvement envisaged under the bank's restructuring plan, i.e. an 8.2% return on tangible equity in 2020 (compared to a €332 million loss at end-2017 and €1.2 billion incurred losses since 2012), which assumes a cost of risk of 64 bp (compared to 215 bp in 2017). The rating agency believes that, despite lower loan loss provisions and significant operating cost reductions, a return to adequate profitability will be more gradual. In particular, achieving a cost-to-income ratio of 58% in 2020, from a relatively high 66% adjusted in 2017 (excluding losses on problem loan sale), will be challenging. Although this only requires a compound annual growth rate in revenue of 2.7%, this target will be difficult to meet while the bank is changing its business model by reducing its headcount by 9% and branches by 30% compared to 2016.

RATIONALE FOR AFFIRMING THE LONG-TERM RATINGS

The affirmation of the deposit rating at Ba3 and senior unsecured MTN rating at (P)B2 reflects (i) the upgrade of the BCA to b2; (ii) the reducing stock of bail-in-able debt, which results in higher loss-given-failure for the bank's junior deposits and senior unsecured bonds; and (iii) Moody's revised view of a low likelihood of government support (from moderate previously), which no longer provides any uplift to the ratings (previously one notch).

Moody's said that, using most recent data and the expected repayment of bonds maturing in Q4 2017 and 2018, its Loss Given Failure (LGF) analysis indicates that CreVal's rated deposits are likely to face very low loss-given-failure, from extremely low previously; this provides two notches of uplift from the b2 BCA, compared to three notches previously.

Similarly, Moody's LGF analysis indicates that CreVal's senior unsecured instruments are likely to face moderate loss-given-failure, from low previously; this provides no uplift from the b2 BCA, from one notch of uplift previously.

Moody's previously considered there to be a moderate probability of government support for CreVal's deposits and senior debt, given examples of partial bail-outs in Italy. However, now that CreVal has successfully raised its own capital, such a rescue is unlikely in the short term and Moody's believes that in the event of CreVal needing further capital at a later stage, tighter conditions on state aid will likely apply. Furthermore, little senior debt will remain by 2019; given these considerations, Moody's now considers the probability of government support to be low.

RATIONALE FOR THE POSITIVE OUTLOOK

Moody's changed the outlook on CreVal's long-term deposit rating to positive from developing, indicating that the risk of failure has diminished and the increased likelihood that, following the share issue, the bank will make progress towards its 2018-2020 business plan targets. This progress, if confirmed, will lead to lower expected loss for depositors. At the same time, Moody's believes that the bank still faces considerable challenges in restoring an adequate level of profitability.

RATIONALE FOR UPGRADING THE CR ASSESSMENT

As part of today's rating action, Moody's has also upgraded to Ba2(cr) from Ba3(cr) the long-term CR Assessment of CreVal, three notches above its adjusted BCA of b2.

The upgrade of the CR Assessment follows the upgrade of the BCA of CreVal to b2 from caa1. The CR Assessment is driven by the standalone assessment of CreVal; the amount of bail-in-able debt and junior deposits remains considerable, shielding operating liabilities from losses, and accounting for three notches of uplift relative to the BCA. In common with the senior MTN and deposit ratings, the CRA does not include any uplift from government support.

FACTORS THAT COULD LEAD TO AN UPGRADE

Moody's said that CreVal's BCA could be upgraded if the bank makes significant progress towards its business plan targets, in particular profitability. Also, as the bank's deposit and MTN ratings are linked to the standalone BCA, any change to the BCA would likely also affect these ratings. Moody's could also upgrade CreVal's deposit or MTN ratings if the issuance of senior or subordinated debt reduces the loss-given-failure for junior deposits or senior debt.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Conversely, Moody's said CreVal's BCA could be downgraded if the bank fails to return to adequate profitability, or is unable to execute the planned sale of loans. As the bank's deposit and MTN ratings are linked to the standalone BCA, any change to the BCA would likely also affect these ratings. Creval's ratings could also be downgraded if reductions in the volume of senior debt outstanding are not offset by new issuance of senior and/or subordinated debt to a degree that preserves current loss-given-failure for these instruments.

LIST OF AFFECTED RATINGS

Issuer: Credito Valtellinese S.p.A.

..Upgrades:

....Adjusted Baseline Credit Assessment, upgraded to b2 from caa1

....Baseline Credit Assessment, upgraded to b2 from caa1

....Long-term Counterparty Risk Assessment, upgraded to Ba2(cr) from Ba3(cr)

....Subordinate Medium-Term Note Program, upgraded to (P)B3 from (P)Caa2

..Affirmations:

....Short-term Counterparty Risk Assessment, affirmed NP(cr)

....Long-term Bank Deposits, affirmed Ba3, outlook changed to Positive from Developing

....Short-term Bank Deposits, affirmed NP

....Senior Unsecured Medium-Term Note Program, affirmed (P)B2

....Other Short-term, affirmed (P)NP

..Outlook Action:

....Outlook changed to Positive from Developing

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carlo Gori
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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