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Rating Action:

Moody's upgrades Monte dei Paschi's ratings to B1 from B2

26 Jun 2014

London, 26 June 2014 -- Moody's Investors Service has today upgraded Banca Monte dei Paschi di Siena SpA's (MPS) long-term senior debt and deposit ratings to B1 from B2. Moody's also raised MPS's baseline credit assessment (BCA) to caa2 from caa3, within the standalone E bank financial strength rating (BFSR) category, which resulted in an upgrade of the bank's subordinated debt rating to Caa3 from Ca.

Moody's decision to upgrade MPS's ratings was caused by the bank's fully underwritten EUR 5billion rights issue, which has strengthened the bank's capital buffer against the pressures from ongoing very poor asset quality and net losses expected for 2014 and potentially also 2015.

All ratings on the bank's long-term debt instruments and programmes are affected by this action. Concurrently, the ratings of MPS's subsidiary MPS Capital Services have been upgraded in line with the parent. The outlook on the bank's senior ratings remains negative, while the standalone BFSR has no outlook at the E level. A full list of rating actions follows at the end of this release.

RATINGS RATIONALE

---RAISING OF THE BCA REFLECTS STRENGTHENED CAPITAL BUFFER AGAINST POOR ASSET QUALITY AND NET LOSSES

MPS is strengthening its capital through a EUR5 billion underwritten share issue, expected to be concluded on 27 June. A large part of the proceeds will be used to repay EUR3 billion of the EUR4.1 billion state aid in the form of hybrid capital it had received in 2012. As a result, the bank reported a pro-forma Basel III Common equity Tier 1 (CET1) ratio of 13.3% as of March 2014 (year end 2013: Basel III CET1 10.8%). This level of capital is needed to partly mitigate the bank's poor and further deteriorating asset quality. This is evidenced (i) by the problem loan-to-total loan ratio which increased to 20% in 2013 (from 16% in 2012 and compares to a 12% system average in Italy at FYE 2013)) and increased further in Q1 2014 to 21%; and (ii) by the ratio of problem loans to equity (pro-forma) plus loan loss reserves of 114% at 2013 year-end. Moody's expects the volume of problem loans to peak in 2015 as a result of the improved, albeit still very sluggish economic growth outlook, and to remain elevated over the next two-three years.

MPS's strengthened capital buffer is also necessary in view of the net losses that continue to be incurred by the bank. In 2013, the bank reported a EUR1.4 billion net loss, following net losses in the previous two years, caused by a low pre-provision income of just 0.9% of average risk-weighted assets and high loan loss provisions. Moody's expects MPS to incur a further net loss in 2014 on the back of ongoing loan loss provisioning costs, and the rating agency considers the bank's EUR200 million net profit target in 2015 challenging to achieve, as it incorporates significantly increased revenues and significantly reduced cost-of-credit assumptions of 106 bps (compared to 210 bps in 2013).

Furthermore, Moody's notes that the 13.3% pro-forma Basel 3 capital ratio includes the remainder of the state aid of EUR 1.07bn, which has to be repaid by 2017, as well as Deferred Tax Assets (net of DTAs convertible into government claims) of about EUR 1.1billion which will be excluded from the Basel III CET1 ratio as of 2019 onwards, and which the EBA is also mostly excluding by applying the phased-in 2016 capital definition for its 5.5% CET1 threshold under the currently performed European bank stress tests.

As a result, Moody's believes that MPS financial fundamentals are still vulnerable and despite the rights issue it is still exposed to the EBA's stress test, as reflected in the caa2 BCA. The raising by one notch to caa2 from caa3 however also reflects the better protection that the higher capital buffer gives against the ECB's base scenario.

--- DEPOSIT AND SENIOR DEBT RATINGS

Moody's upgrade of MPS's long-term deposit rating to B1 reflects the raising of the bank's BCA to caa2 and Moody's unchanged assessment of a high probability of support from the Italian government (rated Baa2, stable outlook), which at these levels translates into four notches of systemic support uplift (unchanged) for the long-term deposit and senior debt ratings.

The outlook for MPS's deposit ratings is negative, reflecting the recent adoption of the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) regulation in the EU. In particular, this reflects that the balance of risk for EU banks' senior unsecured creditors has shifted to the downside as a result of (1) the implementation of legislation underlying the new resolution framework; and (2) the explicit inclusion of burden-sharing with unsecured creditors which reduces the public cost of bank resolutions. Currently, Moody's support assumptions are unchanged; however, the rating agency notes the probability of a downward revision to reflect the new EU framework. For further details, please refer to Moody's Special Comment: "Reassessing Systemic Support for EU Banks," published on 29 May 2014.

SUBORDINATED DEBT

Moody's upgrade of MPS' senior subordinated, Tier III and junior subordinated debt by one notch to Caa3, (P)Caa3 and Ca (hyb) reflects the raising of the bank's BCA to caa2, as subordinated debt is notched off the bank's BCA. Outlook is stable.

WHAT COULD MOVE THE RATING UP/DOWN

Over the medium term, Moody's could raise the standalone BCA if (1) the volume of problem loans is at least stabilising, if not improving; and (2) the bank is able to return to sustained profitability, allowing it to strengthen its capitalisation further to be able to assume the declining value of DTAs in its regulatory capital base and to repay the residual amount of state aid in time. Moody's could upgrade the deposit rating if any upward revision of the BCA more than offsets the negative pressure on systemic support.

Conversely, Moody's could lower MPS's BCA if the ECB's Comprehensive Assessment reveals a material shortfall, or if the recent net capital provision (about EUR 2billion) is largely absorbed by losses in 2014; longer term, downward rating pressure could increase if asset quality continues to deteriorate at an accelerating pace over 2014 (contrary to expectations of a decelerating pace), or if the bank fails to restore profitability in 2015 at least close to break-even.

Moody's could downgrade the B1 deposit rating as a result of a lowering of the BCA or in the event that the rating agency reduces its systemic support assumptions.

MPS CAPITAL SERVICES

Moody's has also upgraded MPS Capital Services' long-term deposit ratings to B1 from B2 and raised its BCA to caa2 from caa3, in line with the parent.

MPS Capital Services' upgrade reflects the upgrade of the parent. At the current rating level, Moody's does not differentiate between the parent and its fully integrated corporate and investment banking subsidiary. This also reflects that the regulation of the bank is at consolidated level, and that there is a regulatory requirement from the parent bank to support MPS Capital Services.

WHAT COULD MOVE THE RATING UP/DOWN

MPS Capital Services' BCA could be raised if the bank's strong integration within the MPS group persists, and if the BCA of MPS is raised. MPS Capital Services' B1 deposit rating could be upgraded if -- in addition to the BCA being raised -- MPS's deposit rating is also upgraded and there is no evidence of reduced support from the group.

Downward pressure on MPS Capital Services' BCA might develop following the lowering of the parent's BCA. A lowering of Moody's support assumptions for the MPS Group might exert downward pressure on MPS Capital Services' deposit rating.

LIST OF AFFECTED RATINGS

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

....Adjusted Baseline Credit Assessment, raised to caa2 from caa3

....Baseline Credit Assessment, raised to caa2 from caa3

....Long-Term Deposit Rating, Upgraded to B1 NEG from B2 NEG

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)B1 from (P)B2

....Subordinate Medium-Term Note Program, Upgraded to (P)Caa3 from (P)Ca

....Tier III Debt Medium-Term Note Program, Upgraded to (P)Caa3 from (P)Ca

....Junior Subordinate Medium-Term Note Program, Upgraded to (P)Ca from (P)C

....Short-Term Medium-Term Note Program, Affirmed (P)NP

....Senior Unsecured Regular Bond/Debenture, Upgraded to B1 NEG from B2 NEG

....Subordinate Regular Bond/Debenture, Upgraded to Caa3 STA from Ca NEG

....Junior Subordinated Regular Bond/Debenture, Upgraded to Ca (hyb) STA from C (hyb)

.... Bank Financial Strength Rating, Affirmed E

.... Short-Term Deposit Ratings, Affirmed NP

....Outlook, Negative(m)

Issuer: Banca Monte dei Paschi di Siena, London

....Senior Unsecured Deposit Program, Affirmed NP

Issuer: MPS Capital Services

.... Adjusted Baseline Credit Assessment, raised to b1 from b3

.... Baseline Credit Assessment, raised to caa2 from caa3

.....Long-Term Deposit Ratings, Upgraded to B1 NEG from B2 NEG

.....Senior Unsecured Deposit Rating, Upgraded to B1 NEG from B2 NEG

.... Bank Financial Strength Rating, Affirmed E

.....Short-term Deposit Ratings, Affirmed NP

....Outlook, Negative

Issuer: MPS Capital Trust I

....Pref. Stock Non-cumulative Preferred Stock, Affirmed C (hyb) STA

....Outlook, Stable

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.

Carlo Gori
Vice President - Senior 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 upgrades Monte dei Paschi's ratings to B1 from B2
No Related Data.
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