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Rating Action:

Moody's confirms Banco Popolare's Ba3 deposit and senior debt rating; outlook stable

27 May 2015

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
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