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Rating Action:

Moody's downgrades Banca MPS to B3 from B1, outlook negative

22 Apr 2015

Standalone BCA confirmed at caa2

London, 22 April 2015 -- Moody's has today downgraded Banca Monte dei Paschi di Siena S.p.A.'s (MPS) deposit and senior debt ratings to B3 from B1. At the same time, the rating agency confirmed the bank's caa2 standalone baseline credit assessment (BCA), while the senior subordinated rating and junior subordinated rating were upgraded to Caa3 from Ca. Additionally, Moody's downgraded the deposit rating of MPS's fully-owned corporate and investment banking subsidiary MPS Capital Services (MPSCS) to B3 from B1, and it confirmed the bank's caa2 BCA.

Moody's said that today's rating action follows the approval of a EUR3 billion capital increase by MPS's shareholders, the implementation of Moody's new bank rating methodology and specifically the advanced Loss Given Failure (LGF) analysis, and the rating agency's lowered government support assumptions for MPS.

This rating action concludes the review on the deposit, senior debt and junior debt ratings initiated on 30 October 2014 and extended on 12 February 2015, and it concludes the review on the BCA and adjusted BCA initiated on 17 March 2015.

RATINGS RATIONALE

RATIONALE FOR THE BCA

Moody's said that the confirmation of MPS's standalone BCA was triggered by the approval of a EUR3 billion capital increase by the bank's shareholders. This capital increase, which is fully underwritten by a pool of investment banks, will lead to a pro-forma Common Equity Tier 1 (CET1) of 11.4%, which will cover the capital shortfall of EUR2.1 billion that resulted from the ECB's comprehensive assessment, and be sufficient to reach the 10.2% prudential CET1 requirement imposed by the ECB (see note 1 at the end of this press release).

At the same time, the rating agency noted that MPS's credit profile remains weak. As at December 2014 problem loans represented almost a quarter of the bank's loan book, a level amongst the highest in Italy (see note 2 at the end of this press release). As a partially mitigating factor, Moody's noted that the coverage of problem loans increased significantly in 2014, to 69% from an average of 55% between 2009 and 2013.

In the coming months MPS plans to repay the EUR1.1 billion still outstanding from the hybrid that it issued in 2013 and that was subscribed by the Italian government; including the capital increase and the repayment of the government hybrid, MPS will report a pro-forma phased-in CET1 of 11.4% as at December 2014. Moody's said that this level remains weak in the context of MPS's very weak asset quality. In particular, the level of problem loans is still higher than the bank's equity and reserves, also including the upcoming capital increase (105%). Additionally, the pro-forma CET1 ratio is only 120bp higher than the 10.2% prudential and specific minimum capital required by the ECB under Pillar 2, amongst the highest levels in Europe.

MPS's profitability remains weak. In 2014, the bank reported a pre-provision profit of EUR724 million, or 0.4% of the bank's assets. Pre-provision profitability is negatively impacted by a series of factors; in particular, significant deleverage, with net loans reducing by 8% in 2014, and increasing proportion of non-interest generating assets, with problem loans increasing from 20% in 2013 to almost a quarter of gross loans in 2014. Moody's said it does not expect significant improvements in the bank's pre-provision profitability for 2015. Net profitability was also negatively influenced by very high cost of credit; in particular, in 2014 the bank reported EUR7.8 billion loan loss charges, more than ten times the bank's pre-provision profit, and more than 6% of loans. The bank reported that the very high level of loan loss charges was significantly influenced by the ECB's Asset Quality Review, which required a thorough revision of the bank's collateral evaluation. The combination of weak pre-provision profitability and very high loan loss charges led to a significant EUR5.3 billion net loss in 2014. Moody's said it expects a lower level of loan loss charges in 2015; however, considering the rating agency's expectations of a still stagnating economic environment in Italy, Moody's said that MPS's cost of risk will remain high, and that it will be challenging for MPS to reach an adequate level of net profitability this year.

RATIONALE FOR THE DEPOSIT AND SENIOR UNSECURED RATING

Moody's said that the downgrade of MPS's deposit and senior unsecured debt ratings derives from the confirmation of the BCA, the introduction of the rating agency's Loss Given Failure (LGF) analysis, and revised government support assumptions.

MPS 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 MPS, 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, MPS'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 results in a Preliminary Rating Assessment for MPS's deposit and senior debt of b3, two notches above the caa2 BCA.

At the same time, Moody's said that the introduction of the BRRD has demonstrated a reduction in the willingness of EU governments to bail-out banks, and this led to lower expectation of government support. MPS is the third largest bank in Italy, but significantly smaller than the largest two banks; as such, Moody's said it does not consider MPS to be a systemically important bank. The rating agency reduced its assumption of government support for MPS to low from very high; the new assumption lead to zero notches of uplift, from four notches previously.

RATIONALE FOR JUNIOR INSTRUMENTS

Taking into account the approved capital increase, Moody's said that the incremental risk of requiring public support has reduced, and it upgraded MPS's senior and junior subordinate ratings to Caa3 from Ca; this level is one notch below the bank's BCA, and it reflects the instruments' high loss-given-failure level.

Moody's has withdrawn the outlooks on all subordinated debt ratings for MPS. It has withdrawn these outlooks 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 NEGATIVE OUTLOOK

The outlook on the deposit and senior unsecured rating is negative, reflecting the challenges that MPS will face in 2015 and 2016. In particular, Moody's said that MPS's profitability and asset quality will remain under pressure in the coming twelve months.

MPS CAPITAL SERVICES

Moody's also downgraded the deposit ratings of MPS's fully-owned corporate and investment banking subsidiary MPSCS, and it confirmed its BCA.

Moody's said that the drivers of the downgrade of MPSCS's deposit ratings were the confirmation of the BCA, the introduction of LGF, and reduced assumptions of government support.

Taking into account the very high interconnections between MPS and MPSCS, the BCA of MPSCS is positioned at the same level as its parent.

Moody's said it believes that a resolution of the MPS group would be done at consolidated level; the rating agency's central scenario is that domestic ring-fencing between MPS and MPSCS would not be applied by the resolution authorities. For this reason, Moody's said it applied MPS's LGF assumptions to MPSCS, which resulted in a Preliminary Rating Assessment for MPSCS's deposit of b3, two notches above the caa2 BCA.

The reduction of government support assumptions on MPS to low from very high also impacted MPSCS, that had previously benefitted from four notches of government support indirectly through MPS. Moody's said that it also reduced its government support assumptions for MPSCS to low.

MPSCS's negative outlook reflects the negative outlook on MPS.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's said that the deposit and senior unsecured ratings for MPS and MPSCS could be upgraded following a raise of MPS's BCA. MPS's BCA could be raised following a reduction in the stock of problem loans, return to sustainable profitability, and improved capital buffers.

The ratings for MPS and MPSCS could be downgraded following a further material deterioration in asset quality, or losses that would reduce the current capital buffers.

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

Downgrades:

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

....Multiple Seniority Medium-Term Note Program, Downgraded to (P)B3 from (P)B1 Rating under review

....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 Negative from B1 Rating under review

....Senior Unsecured Deposit Rating, Downgraded to B3 Negative from B1 Rating under review

..Issuer: MPS Capital Services

.... Adjusted Baseline Credit Assessment, Downgraded to caa2 from b1 Rating under review

....Senior Unsecured Deposit Rating, Downgraded to B3 Negative from B1 Rating under review

Upgrades:

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

....Junior Subordinated Regular Bond/Debenture, Upgraded to Caa3 (hyb) from Ca (hyb) Rating under review

....Multiple Seniority Medium-Term Note Program, Upgraded to (P)Caa3 from (P)Ca Rating under review

....Subordinate Regular Bond/Debenture, Upgraded to Caa3 from Ca Rating under review

Confirmations:

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

.... Adjusted Baseline Credit Assessment, Confirmed at caa2

.... Baseline Credit Assessment, Confirmed at caa2

..Issuer: MPS Capital Services

.... Baseline Credit Assessment, Confirmed at caa2

Outlook Actions:

Outlook, Changed To Negative From Rating Under Review

..Issuer: MPS Capital Services

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

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 downgrades Banca MPS to B3 from B1, outlook negative
No Related Data.
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