DBRS Morningstar Confirms Monte dei Paschi di Siena’s Ratings at B (high), Trend Remains Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banca Monte dei Paschi di Siena SpA (BMPS or the Bank) including the Long-Term Issuer Ratings of B (high) and the Short-Term Issuer Ratings of R-4 following an annual review of the Bank’s credit profile. DBRS Morningstar also confirmed the Long-Term and Short-Term Critical Obligations Ratings (COR) at BBB (low) / R-2 (middle) and the Trend remains Stable. This reflects DBRS Morningstar’s expectation that, in the event of a resolution of the Bank, certain liabilities (such as payment and collection services, obligations under a covered bond program, payment and collection services, etc.) have a greater probability of avoiding being bailed-in and are likely to be included in a going-concern entity. The Bank’s Deposit ratings were confirmed at BB (low)/R-4, one notch above the IA, reflecting the legal framework in place in Italy which has full depositor preference in bank insolvency and resolution proceedings. The trend on the Bank’s long-term ratings remains Negative and the trend on the short-term ratings remains Stable. DBRS Morningstar has also maintained the Intrinsic Assessment at B (high) and the Support Assessment at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

In maintaining the negative Trend, we incorporate our view that the wide scale of economic and market disruption resulting from the coronavirus (COVID-19) pandemic will put additional pressure on the Bank’s profitability and balance sheet. The challenging operating environment in Italy is expected to affect the Bank’s revenues, asset quality and cost of risk. The impact will likely emerge in Q2 2020 onwards, whilst the implications for the medium to long-term will depend on the evolution of the pandemic and the recovery of economic activity in Italy. Downward rating pressure would intensify should the crisis be prolonged.

We will also continue to monitor the performance of the Bank’s asset quality and earnings, as well as the measures being taken to support its franchise and customer base, including the implementation of the debt moratoriums. At the same time, we take into account the impact of unprecedented support measures implemented by the Italian government, as well as several other international authorities and central banks. In our view, the high levels of social support in Italy will mitigate the impact of the crisis on the retail and SME side.

The confirmation of the ratings takes into account the Group’s improved asset quality profile, evidenced by the lower stock of non-performing exposures (NPEs) as well as the further overall progress made by the Bank in 2019 and Q1 2020 on its 2017-2021 restructuring plan. The Bank has been able, since its precautionary recapitalisation, to restore operating profitability and make progress in cleaning the balance sheet. We also understand that the Bank could proceed with further potential NPE disposals, which in our view is key to a successful exit from the Italian government ownership. Nevertheless, overall profitability remains weak and the stock of NPEs high compared to domestic and international peers and we expect a deterioration of the Bank’s risk profile as a result of the COVID-19 pandemic, albeit mitigated by the Italian government and the European authorities’ support measures. The confirmation of the ratings also incorporates the stable funding and liquidity profile, which had improved before the COVID-19 crisis. BMPS was able to restore its access to the wholesale markets through issuances of Senior and Tier 2 bonds, benefiting from the positive funding environment in Italy before March 2020. The ratings also take into account the Bank’s adequate capital position, albeit still pressured by the high NPE exposures and losses in Q4 2019 and Q1 2020.

RATING RATIONALE

BMPS is Italy’s fourth largest bank by total assets and has a significant market share in its home region of Tuscany. The Bank is currently undertaking a restructuring plan for 2017-2021, following the approval of the Italian State’s precautionary recapitalisation of the Bank in 2017. As part of this plan, in 2019 and Q1 2020, BMPS continued to reduce its NPEs and improve efficiency with the closure of branches and headcount reduction. Nonetheless, the Bank continues to face several challenges, particularly in terms of revenue generation and weak asset quality. In line with State Aid procedures and the restructuring plan, the Italian Ministry of Finance (MEF), which is BMPS’s main shareholder with a 68% stake, is expected to submit an exit plan to the European Commission in 2020. In DBRS Morningstar’s view, any plan is likely to be preceded by an acceleration in the Bank’s de-risking plan, which we view as essential.

BMPS’s profitability remained weak in Q1 2020 as the Bank reported a net loss of EUR 244 million compared to net income of EUR 28 million in Q1 2019, mainly driven by additional provisions to incorporate an expected deterioration in the operating environment due to COVID-19. Total revenues decreased around 9% YoY, mainly due to lower Net Interest Income (NII) affected by the persistent low interest rate environment. However, this was partly mitigated by fees and commissions, which were up YoY despite the impact of the lockdown in place in Italy, driven by sustained activity in the first two months of the year and the lower cost of the state guarantees following their repayment. Provisions were up YoY as the Bank booked EUR 315 million of provisions for credit losses in Q1 2020, of which EUR 193 million related to the revision of the macroeconomic scenario for COVID-19. The cost of risk stood at 83 bps, with COVID-19 related provisions representing 23 bps. DBRS Morningstar expects the Bank’s cost of risk to increase in the next quarters as a result of a step-up in loan loss provisioning to reflect the likely deterioration of its loan portfolio. BMPS has maintained progress in reducing its operating costs, which decreased by 3.6% YoY to EUR 548 million in Q1 2020, on the back of the Bank’s restructuring plan. Nonetheless, the cost-to-income ratio (as calculated by DBRS Morningstar) increased to 75% from 70.7% in Q1 2019, due to the more adverse scenario for revenue generation. DBRS Morningstar expects cost discipline to remain a key driver to ensure enough flexibility for the Bank during the current challenging operating environment.

The Group’s asset quality continued to improve in 2019 and Q1 2020. The total stock of gross non-performing loans (NPLs) decreased to EUR 11.6 billion at end-March 2020 from EUR 16.8 billion at end-2018. The reduction was mainly achieved through NPE disposals and reductions of around EUR 4.7 billion completed in 2019 (EUR 2.0 billion in UTPs and EUR 2.7 billion in bad loans), as well as increasing workout activities. The Group’s gross NPL ratio decreased to 11.8% at end-March 2020 from 17.3% at end-2018, whilst the net NPL ratio slightly improved to 6.4% from 9.0% in the same period. Nevertheless, the Bank’s NPL ratios continue to compare unfavourably with the European average and, whilst we expect further disposals, we expect the NPL ratio to deteriorate going forward as the COVID-19 crisis unfolds.

BMPS is largely funded by deposits from retail and corporate clients. Access to wholesale markets remains expensive. Nonetheless, with improving market conditions and lower sovereign spread yields at the beginning of the year, the Bank returned to the wholesale market in January 2020, with the issuance of EUR 400 million of Tier 2 subordinated notes and EUR 750 million of Senior Bonds. DBRS Morningstar expects relatively limited short-term downside risk to the Bank's funding profile as a result of the COVID-19 outbreak given the ECB’s assistance. In Q1 2020 BMPS completely reimbursed the Government Guaranteed Bonds that matured in January (EUR 4 billion) and March (EUR 4 billion). At end-March 2020, the Bank maintains an acceptable liquidity position with a stock of unencumbered assets of EUR 21.7 billion, corresponding to circa 16% of the Bank’s total assets. LCR and NSFR were reported at 162% and 113% respectively at end-March 2020.

In 2019, BMPS’s capitalisation remained adequate, although still pressured by the high NPE exposures, which could pose challenges in the current environment. At end-March 2020, BMPS reported a fully loaded Common Equity Tier 1 (CET 1) ratio of 11.9%, down 80 bps from end-2019, mainly impacted by the phasing-in of the IFRS9 full-time application, lower FVTOCI reserves due to spread widening amidst the COVID-19 crisis and higher risk-weighted assets. The fully loaded total capital ratio stood at 14.5% at end-March 2020. This continues to provide the Group with a comfortable buffer over the Overall Capital Requirement (OCR) for CET1 (phased-in) ratio which was lowered to 8.83% from 10.14% following the Pillar 2 Requirement (P2R) tiering measures announced by the ECB. The minimum Overall Capital Requirement (OCR) for total capital (phased-in), which includes the AT1 and Tier 2 buckets, remains broadly unchanged at 13.64%.

RATING DRIVERS

Any upgrade is unlikely in the short-term given the Negative trend. However, the trend on the Long-Term ratings could revert to Stable if the Bank were able to demonstrate limited earnings and asset quality impact from the global COVID-19 pandemic. An upgrade could also occur should the Bank achieve substantial further progress in asset quality.

A downgrade would likely be driven by a significant deterioration in the Bank’s profitability or capital as a result of the global COVID-19 pandemic. A downgrade could also occur should the Bank experience severe delays in its restructuring plan.

ESG CONSIDERATIONS

DBRS Morningstar views the Business Ethics and the Corporate/Transaction Governance ESG subfactors as significant to the credit rating. These are included in the Governance category. The Bank has suffered a reputational impact from legacy conduct issues, in particular litigation risk linked to former capital increases and the ongoing investigation regarding fraudulent sale of diamonds by Italian banks. In addition, BMPS is 68% owned by the Italian State because of a precautionary recapitalisation which is subject to an EU restructuring plan.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for Banca Monte dei Paschi di Siena SpA are as follows: Franchise Strength – Moderate; Earnings – Weak/Very Weak; Risk Profile – Weak/Very Weak; Funding & Liquidity – Weak; Capitalisation – Weak.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Company Documents, BMPS 2019 and Q1 2020 Reports, BMPS 2019 and Q1 2020 Press Release, BMPS 2019 and Q1 2020 Presentation and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/362710.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: January 18, 2013
Last Rating Date: April 2, 2020

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