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Rating Action:

Moody's changes the outlook on Banca Monte dei Paschi di Siena to positive from negative

09 Jan 2020

BCA upgraded to b3 from caa1, senior unsecured rating affirmed at Caa1

Paris, January 09, 2020 -- Moody's Investors Service (Moody's) today changed the outlook on the senior unsecured debt and deposit ratings of Banca Monte dei Paschi di Siena S.p.A. (MPS) to positive from negative. Moody's upgraded the bank's standalone Baseline Credit Assessment (BCA) to b3 from caa1, upgraded the subordinated debt rating to Caa1 from Caa2, and affirmed the long-term senior unsecured debt and deposit ratings at Caa1 and B1 respectively.

Moody's also upgraded the BCA of MPS Capital Services S.p.A. (MPS Capital Services) to b3 from caa1, reflecting Moody's view that this entity is Highly Integrated and Harmonized (HIH) with MPS and that its standalone characteristics have limited credit significance. MPS Capital Services's B1 long-term deposit ratings were affirmed and the outlook changed to positive from negative, in line with the actions on the parent bank.

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

RATINGS RATIONALE

BCA

The upgrade of MPS's BCA to b3 from caa1 primarily reflects the material improvements in the bank's asset quality. MPS disclosed a pro-forma problem loan ratio of around 12.5% for end-2019, materially down from 18% as of end-2018, as a result of the disposal of €3.8 billion of gross problem loans. The ratio is still much higher than the Italian average of around 8% and the European Union average of around 3%, but is materially improved and means that MPS has beaten the 12.9% NPL ratio target agreed with the European Commission two years ahead of schedule.

The upgrade of the BCA also reflects the improvements in MPS's funding profile, following the bank's issues in the institutional bond market in 2019 of €1.25 billion of senior unsecured debt, €300 million of Tier 2 debt and €2 billion covered bonds, re-establishing some access to wholesale funding. Moody's also expects MPS to repay in the next months the remaining €3.2 billion government guaranteed senior bonds in the market issued in 2017, and to reduce its drawings upon the European Central Bank's (ECB's) Targeted Long-Term Refinancing Operations (TLTRO). MPS's current TLTRO borrowings are currently among the highest in the Euro area at around 12% of the bank's total assets.

At 30 September 2019, MPS reported a transitional Common Equity Tier 1 (CET1) ratio of 14.8% (12.6% fully loaded) and a transitional Total Capital ratio of 16.7% (14.6% fully loaded). These ratios are above the Supervisory Review and Evaluation Process requirement for 2020 yet the bank actually has limited capital headroom in Moody's view given the need to further reduce problem loans and its constrained access to new equity. MPS benefits from ample liquidity although this will in part be used to repay its government-guaranteed bonds and reduce its ECB funding.

MPS announced on 9 January 2020 that it had re-assessed the value of its deferred tax assets (DTAs) as per new tax regulations and the evolution of the macroeconomic scenario, resulting in an impairment of €1.2 billion DTAs out of the total €3.1 billion DTAs outstanding. The impairment will be reflected in the 4Q19 results and will likely result in a material loss for the full year 2019. This loss does not however change Moody's view of MPS's creditworthiness since DTAs are already deducted from capital ratios and therefore their write-down does not represent a change in the bank's ability to absorb unexpected losses.

MPS's BCA of b3 continues to incorporate one-notch negative adjustment for corporate behavior to reflect the continued uncertainty over the bank's strategy going forward. Corporate governance is a key credit consideration for MPS, as weak governance in the past had led to poor strategic decisions. Currently MPS's main shareholder is the Italian Ministry of Finance with a 68% share, making it de facto a nationalised bank. The EU requires the Italian government to dispose of its stake in the bank by 2021 as a condition for the state aid received which is supposed to be precautionary and temporary. To this end MPS will have not only to complete a drastic reduction in problem loans but also achieve further progress in restoring the long-term viability of its franchise. The planned disposal of the government's stake will also likely radically change the bank's governance, depending on the ultimate shareholders.

The upgrade of the BCA of MPS Capital Services to b3 from caa1 is in line with the upgrade of MPS's BCA, as a large portion of MPS Capital Services's activities and revenues is linked to its parent, with which MPS Capital Services shares most of its clients. Furthermore, MPS Capital Services relies upon the management structure of MPS. As such, MPS Capital Services's BCA is practically indistinguishable from that of MPS.

LONG-TERM SENIOR UNSECURED DEBT, SUBORDINATED DEBT AND DEPOSIT RATINGS

The affirmation of the long-term deposit rating at B1 reflects the upgrade of the BCA to b3 from caa1 and very low loss-given-failure, resulting in two notches of uplift from the bank's Adjusted BCA, from extremely low loss-given-failure which gave three notches of uplift previously. This follows the redemption of long-term debt which reduces the protection from loss for deposits.

Similarly, the affirmation of the Caa1 long-term senior unsecured debt rating reflects the upgrade of the BCA, offset by increased loss-given-failure (now high rather than moderate) given the lower volume of senior debt following redemptions.

The upgrade of the rating to Caa1 from Caa2 on MPS's subordinated debt, which was already considered to be subject to high loss-given-failure, reflects the upgrade of the bank's BCA.

Moody's assumes a low likelihood of government support for the bank's rated liabilities, resulting in no further uplift to the long-term senior unsecured debt and deposit ratings.

OUTLOOKS

The outlooks on MPS's long-term senior unsecured debt and deposit ratings are positive, reflecting the possibility for a further material reduction in the bank's problem loans in the medium term whilst maintaining capital levels above regulatory requirements and additional progress in restoring the franchise value the bank.

The positive outlook on MPS Capital Services's long-term deposit ratings reflects the positive outlook on the parent bank.

WHAT COULD MOVE THE RATINGS UP/DOWN

MPS's BCA and long-term ratings could be upgraded following further progress in its restructuring, in particular a return to sustainable profitability, a further material decrease in problem loans and demonstrated access to the senior and subordinated debt markets. The long-term ratings could also be upgraded following the issuance of material bail-in-able debt.

A downgrade of MPS's ratings is unlikely given the positive outlook, but Moody's could downgrade the BCA, senior unsecured debt and long-term deposit ratings if the bank reported material capital-eroding losses or if the bank experienced material deposit outflows. The deposit rating could also be downgraded if the bank did not issue sufficient senior and subordinated debt to maintain the very low loss-given-failure for this rating class.

MPS Capital Services's ratings and assessments could be upgraded or downgraded following and upgrade or downgrade of MPS's ratings and assessments.

LIST OF AFFECTED RATINGS

Issuer: Banca Monte dei Paschi di Siena S.p.A.

..Upgrades:

....Long-term Counterparty Risk Ratings, upgraded to Ba3 from B1

....Long-term Counterparty Risk Assessment, upgraded to Ba3(cr) from B1(cr)

....Baseline Credit Assessment, upgraded to b3 from caa1

....Adjusted Baseline Credit Assessment, upgraded to b3 from caa1

....Subordinate Regular Bond/Debenture, upgraded to Caa1 from Caa2

....Subordinate Medium-Term Note Program, upgraded to (P)Caa1 from (P)Caa2

..Affirmations:

....Short-term Counterparty Risk Ratings, affirmed NP

....Long-term Bank Deposits, affirmed B1, outlook changed to Positive from Negative

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

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

....Senior Unsecured Regular Bond/Debenture, affirmed Caa1, outlook changed to Positive from Negative

....Senior Unsecured Medium-Term Note Program, affirmed (P)Caa1

....Other Short Term, affirmed (P)NP

..Outlook Action:

....Outlook changed to Positive from Negative

Issuer: Banca Monte dei Paschi di Siena, London

..Upgrades:

....Long-term Counterparty Risk Ratings, upgraded to Ba3 from B1

....Long-term Counterparty Risk Assessment, upgraded to Ba3(cr) from B1(cr)

..Affirmations:

....Short-term Counterparty Risk Ratings, affirmed NP

....Short-term Deposit Note/CD Program, affirmed NP

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

..No Outlook assigned

Issuer: MPS Capital Services S.p.A.

..Upgrades:

....Long-term Counterparty Risk Ratings, upgraded to Ba3 from B1

....Long-term Counterparty Risk Assessment, upgraded to Ba3(cr) from B1(cr)

....Baseline Credit Assessment, upgraded to b3 from caa1

....Adjusted Baseline Credit Assessment, upgraded to b3 from caa1

..Affirmations:

....Short-term Counterparty Risk Ratings, affirmed NP

....Long-term Bank Deposits, affirmed B1, outlook changed to Positive from Negative

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

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

..Outlook Action:

....Outlook changed to Positive from Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019. 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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Fabio Ianno
VP - Senior Credit Officer
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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 France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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