DBRS Morningstar Confirms Banca Nazionale del Lavoro’s Long-Term Ratings at A (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banca Nazionale del Lavoro S.p.A. (BNL or the Bank), the Italian banking subsidiary of BNP Paribas SA (BNPP, the Parent or the Group). The ratings include an A (high) Long-Term Issuer Rating and a R-1 (middle) Short-Term Issuer Rating, both with Stable trend. The rating action follows the confirmation of DBRS Morningstar’s ratings on BNPP on 10 July 2020, and considers BNL’s credit fundamentals and financial performance in 2019. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

DBRS Morningstar has maintained the SA1 support assessment of BNL, which implies strong and predictable support from the Parent. The ratings of BNL are positioned one notch below the ratings of BNPP, in line with DBRS Morningstar’s rating approach for core banking subsidiaries located abroad in countries with low cross-border risk. On 10 July 2020, DBRS confirmed BNPP’s Long-Term Issuer Rating of AA (low) with a Stable trend.
The SA1 takes into consideration the 100% ownership of BNL by BNPP, its strategic importance and integration in the Group.

RATING DRIVERS

Given the SA1 designation, BNL’s ratings will generally move in tandem with BNPP’s ratings. An upgrade could follow an upgrade of the parent BNPP’ ratings.

Similarly, a downgrade could result from a downgrade of BNPP’s ratings or should the Bank become a non-core subsidiary for the Group.

RATING RATIONALE

BNL is the banking subsidiary of BNPP in Italy, considered as a domestic market by BNPP. At end-2019, BNL had EUR 82 billion in total assets. The Bank operates in retail and corporate banking with a nationwide franchise and a solid footprint across Central and Western regions of Italy. The Bank has been part of BNPP since its acquisition in 2006.

BNL is viewed as a core component of BNPP’s retail franchise outside of France. In line with BNPP’s strategy, Italy is considered a key “Domestic Market” for the Group together with France, Belgium and Luxembourg. BNL is integrated into the Parent company through shared systems, controls, management and strategy, as well as treasury and risk management. BNL’s franchise, product offering and reputation benefit from being part of a larger Group. BNL has also consistently benefited from financial support from BNPP in various forms. Going forward, DBRS Morningstar expects BNPP to support BNL if needed.

At end-2019, BNPP had provided EUR 11.5 billion in total funds to BNL, corresponding to 14% of the Bank’s total liabilities and funds. Deposits from retail and corporate customers, however, remain the main source of funding, accounting for 60% of the total liabilities and funds. BNL also had EUR 10 billion of ECB funds, originated from its participation in the TLTRO II and III programmes.

The Parent also continues to protect BNL’s capital levels with a non-dividend distribution policy. At end-2019, BNL’s capital position included retained earnings of EUR 176.8 million. he Bank reported a phased-in Common Equity Tier 1 (CET1) ratio of 11.5%. The Total Capital ratio was at 14.0%, up from 12.9% in 2018, which provides a good cushion above the ECB SREP requirements of 8.5% for CET1 and 12.0% for Total Capital.

In DBRS Morningstar’s view, the wide and growing scale of economic and market disruption resulting from the COVID-19 pandemic creates negative pressure for the Bank’s revenues, loan loss provisions and profitability. In 2019, the Bank’s net interest income remained pressured by the low interest rate environment and high market competition despite growing lending volumes and fees, whilst commissions were down year-on-year (YoY). In line with the strategy outlined by BNPP, BNL continues with the implementation of cost efficiency measures, spanning from business simplification to digital transformation. Operating expenses grew YoY as a results of early retirement incentives, and, as a result, the cost-to-income ratio stood at 71.4% in 2019. Although the Bank’s cost of risk reduced in 2019, it remains high. Moreover, we expect loan loss provision to increase in 2020 given higher unemployment combined with GDP drop, as well as IFRS 9 models updates.

BNL’s risk profile is still driven by its large, albeit declining, stock of NPLs. Total gross impaired loans amounted to EUR 6.4 billion at end-2019, down from EUR 9.0 billion at end-2018, thanks to a combination of NPL disposals and write-offs. As a result, the Bank’s total gross NPL ratio decreased to 8.8% at end-2019, from 13.4% at end-2018, which still remains high compared to domestic and international peers.

ESG CONSIDERATIONS

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.

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, BNL 2019 Annual Report 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/363919.

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: December 11, 2017
Last Rating Date: July 15, 2019

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