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Rating Action:

Moody's upgrades Montepaschi's deposit rating to B1; outlook stable

12 Jul 2017

Senior debt rating confirmed at B3; outlook negative

London, 12 July 2017 -- Moody's Investors Services has today upgraded Banca Monte dei Paschi di Siena S.p.A.'s (Montepaschi) long-term deposit rating to B1 from B2, confirmed its long-term senior unsecured rating at B3 and upgraded its standalone baseline credit assessment (BCA) to caa1 from ca.

In addition, the agency confirmed Montepaschi's subordinated rating of Ca and the backed preferred stock ratings of C(hyb) issued by MPS Capital Trust I, which Moody's will withdraw following their conversion into equity.

The rating action concludes the review initiated in July 2016 and reflects Montepaschi's restructuring plan which includes a government recapitalization and reduction in problem loans. The outlook is now stable on the long-term deposit rating and negative on the long-term senior unsecured debt ratings.

The ratings of the fully integrated corporate subsidiary MPS Capital Services S.p.A. continue to reflect those of its parent and Moody's has therefore upgraded its BCA to caa1 from ca and its long-term deposit rating to B1, with a stable outlook.

A full rating list can be found at the end of this press release.

RATINGS RATIONALE

Moody's says that the upgrade of the BCA to caa1 from ca reflects Montepaschi's recapitalization and planned problem loan reduction.

On 5 July 2017, the bank announced:

- An equity capital increase of about €8.2 billion (of which €3.9 billion takes the form of a "precautionary" recapitalization by the Italian government and €4.3 billion reflects the conversion into equity of subordinated debt and preferred stock). Moody's expects this to result in a common equity tier 1 (CET1) ratio of 13.8%, net of a €3.9 billion loss resulting from the bank's planned sale of non-performing loans (NPLs). The European Commission (EC) has approved the precautionary recapitalization and business plan as compliant with European Union (EU) state aid rules and which does not trigger a resolution of Montepaschi under the Bank Recovery and Resolution Directive.

- The planned deconsolidation of €29 billion of NPLs, out of the bank's total problem loans of €46 billion at end-March 2017, through a securitisation with NPLs sold to the securitisation vehicle at a price of 21% and bank rescue fund Atlante buying the junior and mezzanine tranches for €1.6 billion.

- A five-year restructuring plan also approved by the EC, with an intermediate 2019 net profit target of €570 million (compared to a €3.2 billion loss in 2016) assuming a cost of risk of 79 basis points (compared to 419 basis points in 2016).

In Moody's view, the strengthened 13.8% CET1 ratio (up from 6.5% at end-March 2017) compared to its prudential requirement for 2018 of 9.4% and the planned reduction of the bank's problem loan ratio to 16.5% (from 36% at end-March), improves the bank's standalone creditworthiness to a level better reflected by a BCA of caa1.

The BCA of caa1 also captures the difficulty in rebuilding a robust funding structure independent from government support, with a planned increase of deposits to 62% of funding in 2019 (from 49% at end-2016) and a halving of reliance on repos -- which are largely with the ECB -- to 12% of funding.

Moody's does not however factor into the BCA the full benefit of the profitability improvements envisaged under the plan. The rating agency considers that, despite lower loan loss provisions and significant operating cost reductions, a return to adequate profitability will be gradual, and maintaining revenues while changing the business model and aggressively reducing headcount and branches will be challenging.

RATIONALE FOR THE LONG-TERM RATINGS

The upgrade of the deposit ratings to B1 and confirmation of the senior ratings at B3, respectively, reflect: (i) the upgrade of the BCA to caa1; (ii) the low loss-given-failure and one-notch uplift for senior debt (from very low and two-notch previously) following the conversion of subordinated debt into shares; and (iii) the low likelihood of any further government support for the bank benefiting its senior creditors, given state aid rules. This results in no further uplift to the long-term debt and deposit ratings, which previously each benefited from a two-notch uplift in respect of the agency's expectation of government support, which has now been approved.

RATIONALE FOR THE SUBORDINATED RATINGS

The confirmation of the Ca subordinated rating and the C(hyb) preferred stock rating reflects Moody's view that their recovery values, once converted into equity, will be broadly consistent with that implied by the current ratings: between 35% and 65% for subordinated and below 35% for preferred stock. Upon conversion into shares, the ratings will be withdrawn.

RATIONALE FOR THE OUTLOOKS

The outlook on the long-term deposit rating is stable, reflecting Moody's expectation that the bank's financials will remain compatible with a caa1 BCA over the next 12-18 months.

The outlook on the long-term senior rating is negative because the agency expects senior unsecured debt to decrease as bonds mature, which could increase the loss-given-failure of this instrument.

WHAT COULD MOVE THE RATINGS UP/DOWN

Moody's could upgrade the ratings following tangible and sustainable progress towards plan targets, in particular: (i) a return on assets above 0.4%; (ii) a problem loan ratio below 15% of loans; and (iii) increased deposit funding or demonstrated access to the senior and subordinated debt markets, without the benefit of a government guarantee.

Conversely, Moody's could downgrade the ratings if (i) the bank fails to return to consistent profit generation; (ii) the CET1 ratio falls below 12%; (iii) problem loans increase materially once again; or (iv) the bank is not able to increase deposits and remains reliant on government guaranteed funding. Senior debt could also be downgraded if shrinking senior debt increases its loss-given-failure.

LIST OF AFFECTED RATINGS

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

..Upgrades:

....Adjusted Baseline Credit Assessment, upgraded to caa1 from ca

....Baseline Credit Assessment, upgraded to caa1 from ca

....Long-term Counterparty Risk Assessment , Upgraded to B1(cr) from B2(cr)

....Long-term Bank Deposits, upgraded to B1 Stable from B2 Rating under Review

..Confirmations:

....Senior Unsecured Medium-Term Note Program, confirmed at (P)B3

....Senior Unsecured Regular Bond/Debenture, confirmed at B3, outlook changed to Negative from Rating under Review

....Subordinate Medium-Term Note Program, confirmed at (P)Ca

....Subordinate Regular Bond/Debenture, confirmed at Ca

..Affirmations:

....Short-term Counterparty Risk Assessment, affirmed NP(cr)

....Short-term Bank Deposits, affirmed NP

....Other Short Term, affirmed (P)NP

..Outlook Action:

....Outlook changed to Stable(m) from Rating under Review

Issuer: Banca Monte dei Paschi di Siena, London

..Upgrade:

....Long-term Counterparty Risk Assessment, upgraded to B1(cr) from B2(cr)

..Affirmations:

....Short-term Counterparty Risk Assessment, affirmed NP(cr)

....Short-term Deposit Note/CD Program, affirmed NP

..Outlook Action:

....No Outlook assigned

Issuer: MPS Capital Services S.p.A.

..Upgrades:

....Adjusted Baseline Credit Assessment, upgraded to caa1 from ca

....Baseline Credit Assessment, upgraded to caa1 from ca

....Long-term Counterparty Risk Assessment, upgraded to B1(cr) from B2(cr)

....Long-term Bank Deposits, upgraded to B1 Stable from B2 Rating under Review

..Affirmations:

....Short-term Counterparty Risk Assessment, affirmed NP(cr)

....Short-term Bank Deposits, affirmed NP

..Outlook Action:

....Outlook changed to Stable from Rating under Review

Issuer: MPS Capital Trust I

..Confirmation:

....Backed Preferred Stock Non-cumulative, confirmed at C(hyb)

..Outlook Action:

....No Outlook assigned

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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