Standalone BCA upgraded to b2 from b3
London, 27 May 2015 -- Moody's Investors Service has today confirmed Banco Popolare Societa
Cooperativa's (Banco Popolare) Ba3 long-term deposit and
senior debt ratings, and assigned a stable outlook. This
rating action reflects the upgrade of the bank's standalone baseline
credit assessment (BCA) to b2 from b3, the implementation of Moody's
new bank rating methodology and specifically the advanced Loss Given Failure
(LGF) analysis, and lower government support assumptions.
Furthermore, Moody's assigned to Banco Popolare a Counterparty
Risk Assessment (CR Assessment) of Ba2(cr)/Not Prime(cr).
This rating action concludes the review initiated on 17 March 2015.
RATINGS RATIONALE
--- RATIONALE FOR THE BCA
Moody's said that the upgrade of Banco Popolare's BCA was
triggered by the rating agency's expectation of improving profitability
following the bank's strengthened loan loss coverage of non-performing
loans, and by more robust capital levels. At the same time,
the rating agency noted Banco Popolare's still weak asset quality.
Moody's noted that Banco Popolare's loan loss coverage improved
in 2014. Between 2011 and 2013, Banco Popolare reported very
weak loan loss reserves of around 40% of problem loans.
Moody's says that the very high loan loss provisions required by
the European Central Bank's (ECB) Comprehensive Assessment led to
a significantly higher coverage of problem loans, which reached
51% as at December 2014 (see notes 1 and 2 at the end of this press
release).
At the same time, Moody's views Banco Popolare's asset
quality as still very weak, with problem loans representing 17.4%
of the bank's gross loans. Moody's adds that Banco
Popolare's problem loan ratio increased significantly, with
an average 13% growth over the last five years. The high
level of non-performing loans continues to constrain the level
of the bank's BCA.
Banco Popolare's deteriorating asset quality has impacted the bank's
pre-provision profitability, with an increasing proportion
of assets becoming non performing and therefore non-interest generating.
In 2014, the bank reported pre-provision profit of EUR1.1
billion, compared to EUR1.3 billion pre-provision
profit reported in 2013 and 2012.
Deteriorating asset quality, and the need to increase loan loss
coverage, also impacted Banco Popolare's cost of credit;
loan loss charges rose from slightly over 80bp of loans between 2009 and
2011, to 140bp in 2012, 193bp in 2013, and 435bp in
2014. According to Banco Popolare's reports, close
to half of the elevated loan loss charges in 2014 resulted from the ECB
Comprehensive Assessment.
For 2015, excluding extraordinary items, Moody's expects
Banco Popolare's pre-provision profitability to remain stable,
and the cost of risk to reduce from the very high levels of the last two
years. This reduction should in turn improve Banco Popolare's
profitability. At the same, the rating agency notes that
it is unlikely that Banco Popolare will report a cost of credit in line
with pre-crisis levels, and that the bank's profitability
will remain under pressure.
In 2014, ahead of the ECB Comprehensive Assessment, Banco
Popolare increased its capital by EUR1.5 billion, which led
to a Common Equity Tier 1 (CET1) ratio under Basel III of 12.0%
as at December 2014, including a 10bp positive impact from the merger
of its fully-owned subsidiary Banca Italease in 1Q 2015; this
is equivalent to Moody's Tangible Common Equity / adjusted risk-weighted
assets of 10.3%. Moody's says that Banco Popolare's
capital adequacy now has a significant buffer over the prudential 9.4%
minimum CET1 imposed by the ECB.
--- RATIONALE FOR THE DEPOSIT AND SENIOR UNSECURED
RATING
Moody's says that the confirmation of Banco Popolare's deposit
and senior unsecured debt ratings derives from the upgrade of the BCA,
the introduction of the rating agency's Loss Given Failure (LGF)
analysis, and revised government support assumptions.
Banco Popolare is subject to the EU Bank Resolution and Recovery Directive
(BRRD), which Moody's considers to be an Operational Resolution
Regime. The rating agency's standard assumptions, which
are applied to Banco Popolare, assume residual tangible common equity
of 3% and losses post-failure of 8% of tangible banking
assets, a 25% run-off in junior wholesale deposits,
a 5% run-off in preferred deposits, and a 25%
probability of deposits being preferred to senior unsecured debt.
Under these assumptions, Banco Popolare's deposits and senior
unsecured debt are likely to face very low loss-given-failure,
due to the loss absorption provided by subordinated debt and, potentially,
by senior unsecured debt should deposits be treated preferentially in
a resolution, as well as the substantial volume of deposits themselves.
This provides two notches of uplift for deposits and senior unsecured
above the b2 BCA.
At the same time, Moody's says that the introduction of the
BRRD has demonstrated a reduction in the willingness of EU governments
to bail-out banks, and this led to a lower expectation of
government support. Banco Popolare is the fourth largest bank in
Italy (Baa2 stable), but significantly smaller than the largest
two banks; as such, Moody's says that it does not consider
Banco Popolare to be a systemically important bank. The rating
agency reduced its assumption of government support for Banco Popolare
to low from high; the new assumption leads to no notches of uplift,
from three notches previously.
--- RATIONALE FOR JUNIOR INSTRUMENTS
Moody's says that the one-notch upgrade of Banco Popolare's
junior instruments derives from the one-notch upgrade of the bank's
BCA, as well as the instruments' high loss-given-failure
level. The rating on Banco Popolare's subordinated debt remains
one notch below the BCA; the ratings on the bank's junior subordinate
debt and preferred stock (the latter also issued by backed vehicles) remain
two and three notches below the BCA respectively, reflecting high
expected loss severity as well as higher instrument-specific probability
of default compared with senior subordinated debt.
Moody's has withdrawn the outlooks on all subordinated debt ratings
for Banco Popolare and related backed vehicles for its own business reasons.
Please refer to Moody's Investors Service's Policy for Withdrawal of Credit
Ratings, available on its website, www.moodys.com.
Outlooks are now only assigned to long-term senior debt and deposit
ratings, indicating the direction of any rating pressures.
--- RATIONALE FOR THE STABLE OUTLOOK
The outlook on the deposit and senior unsecured rating is stable,
reflecting the still fragile economic recovery in Italy. After
a GDP reduction of 1.7% in 2013 and 0.4% in
2014, Moody's says it expects Italian GDP to grow by less
than 1% in both 2015 and 2016. Any downward revision of
the scenario would likely offset the positive trend in profitability.
--- RATIONALE FOR THE CR ASSESSMENT
As part of today's actions, Moody's has assigned a Ba2(cr)/Not
Prime(cr) CR Assessment to Banco Popolare and its London branch,
three notches above the BCA. Banco Popolare's CR Assessment
is driven by the bank's b2 BCA, and by substantial bail-in-able
debt and deposits likely to support the operating obligations.
The CR Assessment, which is not a rating, reflects an issuer's
probability of defaulting on certain bank operating liabilities,
such as covered bonds, derivatives, letters of credit and
other contractual commitments. In assigning the CR Assessment,
Moody's evaluates the issuer's standalone strength and the
likelihood, should the need arise, of affiliate and government
support, as well as the anticipated seniority of counterparty obligations
under Moody's advanced Loss Given Failure framework. The
CR Assessment also assumes that authorities will likely take steps to
preserve the continuity of a bank's key operations, maintain
payment flows, and avoid contagion should the bank enter a resolution.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's said that Banco Popolare's ratings could be upgraded
following a return to sustainable profitability, together with stabilising
asset quality.
Banco Popolare's ratings could be downgraded following further losses
in 2015, or following a further material deterioration in asset
quality.
Note 1: Unless noted otherwise, data in this report is sourced
from company reports and Moody's Banking Financial Metrics.
Note 2: Problem loans include non-performing loans (sofferenze),
watchlist (incagli), restructured (ristrutturati), and past-due
(scaduti); we adjust these numbers and only incorporate 30%
of the watchlist category as an estimate of those over 90 days overdue.
LIST OF AFFECTED RATINGS
Confirmations:
..Issuer: Banco Popolare Societa Cooperativa
....Senior Unsecured Deposit Rating,
Confirmed at Ba3
... Issuer Rating, Confirmed at Ba3
....Senior Unsecured Medium-Term Note
Program, Confirmed at (P)Ba3
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Ba3
..Issuer: Banco Popolare Luxembourg S.A.
....Senior Unsecured Medium-Term Note
Program, Confirmed at (P)Ba3
..Issuer: Banca Italease S.p.A.,
now merged into Banco Popolare Societa Cooperativa
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Ba3
Upgrades:
..Issuer: Banco Popolare Societa Cooperativa
....Baseline Credit Assessment, Upgraded
to b2 from b3
....Adjusted Baseline Credit Assessment,
Upgraded to b2 from b3
....Subordinate Medium-Term Note Program,
Upgraded to (P)B3 from (P)Caa1
....Subordinate Regular Bond/Debenture,
Upgraded to B3 from Caa1
....Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Caa2 (hyb) from Caa3 (hyb)
..Issuer: Banca Popolare di Lodi Investor Trust III
....Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Caa2 (hyb) from Caa3 (hyb)
..Issuer: Banca Italease Capital Trust
....Pref. Stock Non-cumulative
Preferred Stock, Upgraded to Caa2 (hyb) from Caa3 (hyb)
..Issuer: Banca Italease S.p.A.,
now merged into Banco Popolare Societa Cooperativa
....Subordinate Regular Bond/Debenture,
Upgraded to B3 from Caa1
Assignments:
..Issuer: Banco Popolare Societa Cooperativa
.... Counterparty Risk Assessment, Assigned
Ba2(cr); NP(cr)
..Issuer: Banco Popolare Societa Cooperativa,
London Br
.... Counterparty Risk Assessment, Assigned
Ba2(cr); NP(cr)
Outlook:
..Issuer: Banco Popolare Societa Cooperativa
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Banco Popolare Luxembourg S.A.
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Banca Popolare di Lodi Investor Trust III
....Outlook, Changed To No Outlook From
Rating Under Review
..Issuer: Banca Italease Capital Trust
....Outlook, Changed To No Outlook From
Rating Under Review
..Issuer: Banca Italease S.p.A.,
now merged into Banco Popolare Societa Cooperativa
....Outlook, Changed To Stable From
Rating Under Review
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
March 2015. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
Edoardo Calandro
Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Nicholas Hill
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454
Moody's confirms Banco Popolare's Ba3 deposit and senior debt rating; outlook stable