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Rating Action:

Moody's downgrades Banca Popolare di Milano to B1; outlook negative

18 Sep 2013

London, 18 September 2013 -- Moody's Investors Service has today downgraded Banca Popolare di Milano (BPM)'s long-term debt and deposit ratings to B1 from Ba3 prompted by the concurrent lowering of the bank's standalone baseline credit assessment (BCA) to b2 from b1.

The outlook is negative, in line with the majority of Italian banks, reflecting the bank-specific issues surrounding corporate governance, as well as the ongoing pressure from the operating environment.

A full list of the ratings affected by today's rating action is included at the end of this press release. This rating action concludes the review for downgrade which has been initiated on 16 May 2013.

RATIONALE FOR DOWNGRADE

Moody's says that the lowering of the standalone BCA by one notch was triggered primarily by the ongoing delay in reforming the corporate governance structure of the bank, a point that the Bank of Italy (BoI) has stressed several times in its inspections of the bank. Moody's believes that this prolonged postponement of necessary reforms may impact the ability of the bank's senior management to focus on, and in turn successfully complete, the turnaround of the bank. The b2 rating level also factors in the bank's continuing deterioration in asset quality as well as the challenges it faces in successfully executing the capital raising at a time when an increasing number of Italian banks is forced to shore up their capital base by tapping the equity markets.

The agency notes that BPM will update its business plan by end October 2013. This plan must include proposed changes in the corporate governance of the bank. In line with statement's from the bank's senior management, the plan is likely to propose measures to modify BPM's governance structure, by reducing the substantial influence of its employees/shareholders and increasing the power of institutional investors.

Following the results of the BoI inspection concluded in May 2013, Moody's expects a partial removal, in the coming months, of the Risk Weighted Assets (RWA) add-ons, which were imposed by the BoI in April 2011, following the outcome of a regulatory inspection, which unveiled significant deficiencies in risk management. According to BPM, the regulator will remove the add-on if it is satisfied with (1) the corporate governance changes taking place at the bank; and (2) the actions to resolve the critical issues related to three organizational aspects: (a) exposure to the real-estate sector; (b) real-estate guarantees for mortgage loans; and (c) operational risks. Considering the positive results already obtained in the turnaround of the bank, the rating agency anticipates this process may be relatively short. Progress in this respect is a factor limiting the downgrade taken today to one notch.

Furthermore, Moody's positively notes that in June BPM's extraordinary shareholders meeting approved a EUR500 million rights issue. This is planned to take place after the presentation of the new business plan and the new corporate governance measures, thus providing more clarity to potential investors.

In H1 2013, BPM booked an adjusted (note 1) pre-tax income of EUR236 million (H1 2012: EUR151 million). Even though it declined year-on-year, net interest income (NII) showed an improvement in Q2 2013, because of a 7% quarter-on-quarter increase (excluding some extraordinary items), as a result of more cost-effective funding and a stable contribution from carry trades. Commission income increased by 14.4% year-on-year, owing to higher fees from asset-management product placements, while an increase in trading and other revenues (+57.7% year-on-year) was primarily driven by trading income from the bank's securities portfolio, which rose by around EUR73 million in H1 2013.

Following the appointment of a new CEO in January 2012, the new management team started to implement a heavy cost-cutting programme, with the double objective of improving the bank's efficiency and streamlining the organisation. Some improvements are already visible, with a material headcount reduction since end-H1 2012, and the liquidation or merging of various subsidiaries. These improvements mirrored the decline in operating expenses, as the most recent (normalised) levels decreased by 7.1% in 2012 (net of any recurring income items such as EUR213 million from staff restructuring). The trend was further confirmed by H1 2013 results, which pointed to an additional 4.7% year-on-year reduction in operating expenses. Despite the large loan-loss provisions already made in Q4 2012, these remained high in H1 2013 (39.5% of pre-provision income) and increased compared with H1 2012 (+27.5%).

The banks' ratings reflect the increase in BPM's ratio of problem loans (note 2) to gross loans to 10% at end-H1 2013 (end-2012: 8.6%). At end-H1 2013, loan-loss reserves as percentage of problem loans stood at 49.6% (end-2012: 52.8%), below the 55% end-2012 system average (note 3). Problem loans as percentage of the sum of shareholder equity and loan-loss reserves stood at 65% at end-H1 2013, up from 55% of end-2012, mainly driven by the reduction in capital, following the Tremonti bond repayment.

(note 1) Unless noted otherwise, data in this report are sourced from company's reports or Moody's Financial Metrics.

(note 2) Problem loans include: non-performing loans (sofferenze), watchlist (incagli), restructured (ristrutturati) and past due loans (scaduti). Moody's adjusts these numbers and only incorporates 30% of watchlist category loans as an estimate of those 90+ days overdue.

(note 3) Source: Bank of Italy's 2012 annual report, published in May 2013.

WHAT COULD MOVE THE RATING -- DOWN/UP

A further downgrade of BPM's ratings could result from (1) inability to present and implement effective measures to improve the bank's corporate governance; (2) a delay or a stop in the RWA add-on removal process because of corporate governance issues; (3) a delay or an inability to raise the full EUR500 million of fresh equity; and (4) a delay or a stop in the bank's turnaround process, and lack of sustainable improvements in profitability.

At present, there is no upward pressure on the ratings, considering the negative outlook. However, the following elements could have a positive impact on the ratings over the medium term (1) a material and sustainable improvement in the internal capital generation; and (2) strengthening of the capital base on top of the planned EUR500 million equity issuance.

LIST OF AFFECTED RATINGS

- Baseline Credit Assessment: lowered to b2 from b1

- Senior unsecured debt and EMTN, and bank deposits: downgraded to B1 from Ba3, and to (P)B1 from (P)Ba3

- Subordinate debt and EMTN: downgraded to B3 from B2, and to (P)B3 from (P)B2

- Tier III EMTN: downgraded to (P)B3 from (P)B2

- Junior subordinate EMTN: downgraded to (P)Caa1 from (P)B3

- Non-cumulative Preferred stock: downgraded to Caa3(hyb) from Caa2(hyb)

- BPM Capital Trust I (Non-cumulative Preferred stock): downgraded to Caa3(hyb) from Caa2(hyb)

All ratings above carry a negative outlook.

BPM is headquartered in Milan, Italy and had consolidated total assets of EUR50.97 billion as at June 2013.

The principal methodology used in these ratings was Global Banks published in May 2013. 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.

Dany Castiglione
Asst Vice President - 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

Johannes Felix Wassenberg
MD - Banking
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 Popolare di Milano to B1; outlook negative
No Related Data.
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