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 SpA (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 a Stable trend. The rating action follows the confirmation of DBRS Morningstar’s ratings on BNPP on June 29, 2021, and considers BNL’s credit fundamentals and financial performance in 2020. 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 on 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 June 29, 2021, 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’s 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-2020, BNL had EUR 96 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, and DBRS Morningstar views that 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. DBRS Morningstar expects BNPP to support BNL if needed.

At end-2020, BNPP had provided EUR 6.2 billion in total funds to BNL, corresponding to 6% of the Bank’s total liabilities and funds. Deposits from retail and corporate customers, however, remain the main source of funding, accounting for 63% of the total liabilities and funds. BNL also had EUR 17.3 billion of ECB funds, as a result of the Bank’s participation in the TLTRO III programme.

The Parent also continues to protect BNL’s capital levels with a non-dividend distribution policy. At end-2020, BNL’s capital position included retained earnings of EUR 231.2 million. The Bank reported a phased-in common equity tier 1 (CET1) ratio of 11.8%, and a total capital ratio of 14.3%, up from 14.0% in 2019, which provides a good cushion above the ECB SREP requirements of 8.8% for CET1 and 13.0% for Total Capital.

The Bank’s results in 2020 were impacted by the COVID-19 pandemic, mainly in the form of higher provisions in anticipation of the deterioration of macroeconomic scenarios and pressure on revenues although these were somewhat offset by a continued downward trend in operating expenses. Net interest income remained pressured by the low interest rate environment and higher deposits, albeit these were compensated by volume growth and the positive impact from TLTRO III. Fees and commissions were down year-on-year (YoY), impacted by the lockdowns in Italy as well as lower transaction volumes. Similar to its parent BNPP, BNL continues with the implementation of cost efficiency measures, spanning from business simplification to digital transformation. Operating expenses decreased YoY owing to cost savings measures such as early retirement incentives. and, as a result, the cost-to-income ratio improved to 63.4% in 2020. The cost of risk, which had previously been reducing, grew 9.5% YoY as it incorporated provisions on performing loans on the back of the revisions of COVID-19-impacted macroeconomic scenarios. We expect the cost of risk to revert to a lower level in 2021 compared to 2020.

BNL’s risk profile is still driven by its large, albeit declining, stock of NPLs. Total gross impaired loans amounted to EUR 6.0 billion at end-2020, down from EUR 6.4 billion at end-2019, thanks to a combination of NPL disposals and write-offs. As a result, the Bank’s total gross NPL ratio decreased to 6.9% at end-2020, from 8.9% at end-2019, which still remains high compared to domestic and international peers. Nevertheless, DBRS Morningstar expects the ratios may deteriorate when government support measures expire.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 2020 Consolidated 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/380802

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: December 11, 2017
Last Rating Date: July 10, 2020

DBRS Ratings GmbH
Neue Mainzer Straße 75
Tel. +49 (69) 8088 3500
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.