MPS Capital Services downgraded to the same level
Milan, October 18, 2012 -- Moody's Investors Service has today downgraded the long-term
debt and deposit ratings of Banca Monte dei Paschi di Siena (MPS) by two
notches to Ba2 from Baa3, the short-term rating to Not-Prime
from Prime-3 and the standalone bank financial strength rating
(BFSR) to E, equivalent to a standalone baseline credit assessment
of caa1, from D/ba2. The outlook remains negative.
The lowering of MPS's standalone risk measures reflect Moody's
view that, notwithstanding the prospective EUR1.5 billion
capital injection by the Italian government, there remains a material
probability that the bank will need to seek further external support over
the rating horizon. As a result of the stress test jointly undertaken
by the European Banking Authority (EBA) and the Bank of Italy which directed
banks to have a minimum 9% Core Tier 1 ratio, MPS has not
been able to increase its capital base to the required level and hence
elicited government's assistance. In the event of a further
deterioration of its asset quality, which Moody's considers
is likely given the weak growth prospects for Italy's economy and
the EU operating environment, there is a strong probability that
the bank would not be able to generate sufficient capital internally to
maintain regulatory capital levels.
The actions on MPS's deposit ratings reflect the increase in risk
to depositors and other creditors implied by the bank's weak standalone
strength, partially offset by the heightened likelihood of support
evidenced by the
government's recent actions.
RATINGS RATIONALE
MPS's asset quality is weak and will, in Moody's view,
continue to deteriorate given the Italian economy's weak growth
prospects during the remainder of 2012 and for 2013. MPS's
reported problem loans have risen to 17% of total loans in June
2012 and are significantly above the around 13% average of Italian
banks rated by Moody's. Moody's recently-published
GDP growth outlook for Italy estimates a range of -2.5%
to -1.5% for 2012, and a range of -1.0%
to 0% for 2013, with significant downside risks to these
forecasts. Asset impairments generally follow economic downturns
with a lag of up to 12-18 months, which would indicate that
MPS's asset quality is likely to continue to deteriorate throughout
2013 and 2014.
Against this negative asset-quality outlook, Moody's
notes MPS's weak internal capital-generation capacity.
MPS has not been able to generate capital internally between 2011 and
H1 2012, even excluding EUR5.8 billion goodwill impairments
from the bank's net result. MPS's weak profitability
and fragile asset quality exacerbate its weak funding position,
leaving it unable to access the capital markets and in consequence making
MPS highly reliant on the European Central Bank for funding (at EUR31.5
billion as of June 2012). This exposes it to the ECB's decision-making
process, which it cannot fully influence.
Moody's understands that the bank's business plan aims to
address these weaknesses through measures such as deleveraging to reduce
the high consumer and corporate loan-to-deposit ratio to
110% in turn reducing reliance on central bank funding, and
cost-cutting to improve profitability. However, Moody's
believes that the plan is subject to significant execution risk,
given the challenging operating environment. Worsening macroeconomic
and market conditions compared with the plan's assumptions (a distinct
possibility given that Italy's recent GDP forecasts have already
deteriorated) would constrain the bank's turnaround.
These concerns translate into a standalone credit assessment of E/caa1,
indicating a heightened risk over the medium term that MPS may require
further external support notwithstanding its ostensibly strong capital
position postinjection. In Moody's view, this is likely
to take the form of systemic (government) support, in view of the
past challenges that MPS's shareholders have faced when attempting
to recapitalise MPS. The E/caa1 standalone credit assessment reflects
the positive impact of the planned capital strengthening from the government
by year-end 2012, amounting to EUR1.5 billion of capital
that the Italian government has committed to inject , increasing
MPS's Core Tier 1 (pro forma for the European Banking Authority's
requirements) by around 156 bps to 9.06%.
LONG-TERM DEBT AND DEPOSIT RATINGS
MPS's Ba2 debt and deposit ratings balance (1) the risk for bondholders
stemming from MPS's heightened standalone risk profile against (2)
the demonstrated willingness and ability of the Italian government to
support this institution. The bank's bondholders' position
in any potential renewed public recapitalisation would be subject to political
decisions not simply in Italy but potentially to the European Commission's
scrutiny, for example since any further state aid/support would
likely require the approval from the European Commission which might require
burden sharing with creditors and other measures that may weaken MPS's
franchise. Moody's has therefore incorporated five-notches
of uplift of the debt/deposit ratings from its E/caa1 standalone credit
assessment but downgraded the bank's senior debt ratings to Ba2
with a negative outlook from Baa3, negative outlook, to reflect
this risk.
SUBORDINATED DEBT AND HYBRID RATINGS
Given the heightened risk of burden sharing for junior creditors should
MPS require further external support, subordinated debt and hybrid
ratings are notched off the caa1 standalone baseline credit assessment,
with senior subordinated debt and Tier III rated Caa2, junior subordinated
debt at Caa3 and preferred stock at Ca.
WHAT COULD MOVE THE RATING UP/DOWN
At present, there is limited upwards pressure on the debt and deposit
ratings; however, the following factors could merit a higher
standalone credit assessment over the medium term (1) the successful implementation
of the business plan, resulting in notably improved profitability
and internal capital generation; and (2) significant shareholder's
capital injections improving the resilience against further asset-quality
deterioration and reducing the risk of public recapitalisations with the
attached uncertainties.
However, an improvement in the standalone credit assessment would
be unlikely to result in an upgrade of the deposit rating, given
the very high level of systemic support uplift which Moody's incorporates
into the deposit ratings.
Conversely, downwards pressure might develop on the ratings following
(1) challenges in executing the business plan, for example,
because of a more difficult operating environment; or (2) a weakening
of Italy's capacity to extend systemic support. Equally,
if the need for renewed public support becomes more evident and visible,
this might exert pressure on the standalone ratings, as well as
the debt and deposit ratings.
MPS CAPITAL SERVICES
Moody's has downgraded the group's corporate banking subsidiary
MPS Capital Services to Ba2/Not-Prime with a negative outlook,
from Baa3/Prime-3 and its standalone BFSR to E/caa1 from D-/ba3.
The ratings are at the same level of the parent, reflecting the
bank's close integration with its parent.
RATING OVERVIEW
1. MPS (ratings/outlook, if applicable)
- Senior unsecured debt and EMTN, and bank deposits:
Ba2; (P)Ba2 / negative
- Short-term debt and deposit: NP
- Subordinate debt and EMTN: Caa2; (P)Caa2 / negative
- Tier III EMTN: (P) Caa2 / negative;
- Junior subordinate and EMTN: Caa3(hyb); (P)Caa3 /negative
- Preferred stock: Ca (hyb) / negative
- Bank Financial Strength Rating: E / stable
- Baseline Credit Assessment: caa1
2. MPS Capital Services
- Bank deposits: Ba2 / negative; NP
- Bank Financial Strength Rating: E / stable
- Baseline Credit Assessment: caa1
The principal methodology used in these ratings was Moody's Consolidated
Global Bank Rating Methodology published in June 2012. 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 relevant 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
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this announcement provides relevant 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 relevant 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
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Carlo Gori
Vice President - Senior Analyst
Financial Institutions Group
Moody's Italia S.r.l
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Milan 20122
Italy
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Johannes Wassenberg
MD - Banking
Financial Institutions Group
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Moody's downgrades Banca Monte dei Paschi di Siena to Ba2/NP from Baa3/P-3; outlook negative
