DBRS Morningstar Confirms Intesa Sanpaolo’s Issuer Ratings at BBB (high)/R-1 (low); Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Intesa Sanpaolo SpA (ISP or the Bank), including the Long-Term Issuer Rating of BBB (high) and the Short-Term Issuer Rating of R-1 (low). The trend on all ratings is Stable. The Intrinsic Assessment (IA) of the Bank is maintained at BBB (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

The confirmation of ISP’s ratings and the Stable trend takes into account the Bank’s leading retail and commercial banking franchise in Italy, supported by its diversified business model and solid earnings profile. Furthermore, DBRS Morningstar considers the Bank’s robust funding profile, solid capital position, as well as the considerable improvement that ISP has achieved with its risk profile despite the challenges posed by the pandemic and the Bank’s exposure to Russia.

The Bank has reduced its exposure to Russia since Q1 2022, reaching a low level in Q1 2023, and any potential direct further impact would be negligible. Some pressures on the Bank’s financials may arise in the medium to long term in DBRS Morningstar’s view, given the uncertainty in the economic environment mainly resulting from high and persistent inflationary pressure, rising interest rates and sluggish economic growth. In DBRS Morningstar’s view, however, the Bank has sound buffers stemming from its adequate capitalization, good profitability, and sound liquidity that could cushion the potential pressures.

ISP’s Long-Term Senior Debt rating and Deposit ratings are both positioned in line with the sovereign rating of Italy. While we continue to recognise the strengths of ISP’s business model, its leading market positions and solid capital levels, ISP’s ratings are highly correlated with any changes made to the sovereign rating, given its high exposure to Italian sovereign bonds and concentration in the domestic banking market. The Stable trend is also in line with the trend on DBRS Morningstar’s sovereign rating on the Republic of Italy (BBB (high) / R-1 low / Stable).

RATING DRIVERS

An upgrade would likely be driven by an upgrade of Italy’s sovereign rating, assuming the Bank maintains its current fundamentals, including adequate profitability, its improved asset quality and solid capital position.

A downgrade would result from a downgrade of Italy’s sovereign rating or a material deterioration in the Bank’s risk profile and capital position.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong / Good

With EUR 955 billion of total assets as of end-March 2023, ISP is the largest Italian banking group providing universal banking products to corporate and retail clients mainly in Italy. The Bank maintains a solid competitive position in Italy underpinned by its large domestic franchise, well diversified business model, and strong reputation. Revenue diversification towards fee-driven activities including asset management, private banking and insurance, as well as strong cost discipline have been key contributors to the Bank’s resilient pre-provision income. Under the new 2022-2025 business plan, the Bank remains focused on further de-risking, cost control and digitisation, as well as greater income diversification from commissions driven by wealth management, protection and advisory, and stronger commitment on sustainability and ESG.

Earnings Combined Building Block (BB) Assessment: Good / Moderate

In Q1 2023, ISP reported a strong net income of around EUR 2 billion, up 88% Year-On-Year (YOY) driven by a combination of a sharp increase in net interest income (NII) and a significant drop in loan loss provisions (LLPs). We note that Q1 2022 results were impacted by high provisioning expenses for Russian-linked exposures, and excluding this, net income would have increased by 16% YOY in Q1 2023. NII experienced strong growth in Q1 2023, up 66% YOY primarily driven by higher interest rates, which offset the lower contribution from TLTRO. The cost to income ratio reached a relatively low of 41.9% in Q1 2023, further down from 46.6% in Q1 2022. In Q1 2023, the Bank’s annualised cost of risk was low at 17 bps, down from 70 bps in FY 2022 (or from 30 bps excluding LLPs for Russia-Ukraine exposure, management overlays, provisions for de-risking, net of partial release of overlays previously booked due to COVID-19).

Risk Combined Building Block (BB) Assessment: Good / Moderate

In DBRS Morningstar’s view, Intesa has sound asset quality backed by a lower stock of NPLs, adequate provisions, and prudent underwriting. Since NPLs peaked in Q3 2015, the total stock of gross NPLs has decreased by around 83% to EUR 10.8 billion as of end-March 2023. The reduction in NPLs was mainly driven by large disposals, as well as by recoveries and lower NPL inflows as consistent with the improving performance of Italian economy. Gross bad loans accounted for 36% of the Bank's total stock of gross NPLs as of end-March 2023. In Q1 2023, Intesa reported a low gross NPL ratio of 2.4%, down from 3.0% one year earlier. On a net basis, the Bank reported an NPL ratio of 1.2%, down from 1.4% in Q1 2022. ISP has actively reduced its direct exposure to Russia, including the cross-border exposure, from around EUR 8.9 billion in terms of Risk-Weighted Assets (RWAs) in Q1 2022 (2.7% of the Group’s RWAs) to EUR 4.8 billion in Q1 2023 (1.6% of the Group’s RWAs).

Funding and Liquidity Combined Building Block (BB) Assessment: Good

ISP has a robust funding profile and a solid liquidity position. The Bank’s well-established and granular retail deposit franchise provides ISP with a resilient funding structure. ISP's access to the international funding market has remained stronger than its Italian peers reflecting a strong market position, even during periods of stress. ISP’s liquidity position remained solid as of end-March 2023, with a EUR 272 billion stock of liquid assets, and a EUR 166 billion stock of unencumbered eligible assets with central banks, net of haircuts. The Group’s Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) stood at 176% and 125%, respectively, as of end-March 2023, well above regulatory minimum requirements. However, we expect these ratios to decrease with the repayment of the TLTRO in 2023. The Group’s recourse to TLTRO III funds amounted to EUR 76 billion in Q1 2023, down from around EUR 132 billion in Q1 2022.

Capitalisation Combined Building Block (BB) Assessment: Good / Moderate

Intesa maintains a solid capital position while distributing a sizable proportion of earnings. At end-Q1 2023, the Bank reported a fully loaded CET1 ratio of 13.7%, a fully loaded total capital ratio of 19.5%, and a fully loaded leverage ratio of 5.7% including the exposures with the ECB. The bank’s capital ratios remained largely stable in Q1 2023 supported by lower RWAs largely reflecting de-risking of credit portfolio. ISP’s capital ratios remain well above the SREP minimum requirements applicable for 2023.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/414493.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Credit rating actions on the Republic of Italy are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of Italy are discussed separately at https://www.dbrsmorningstar.com/issuers/17689.

There were no Environmental factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The following methodologies have also been applied
• DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (28 March 2023) -
https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, Intesa Sanpaolo Q1 2023 Results Press Release, Intesa Sanpaolo Q1 2023 Results Presentation, Intesa Sanpaolo Q1 2023 Report, Intesa Sanpaolo Annual Reports 2018-2022, Intesa Sanpaolo 2022 Non-Financial Statement. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/414492.

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

Lead Analyst: Nicola De Caro, Senior Vice President – Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President - Credit Practices Group
Initial Rating Date: September 19, 2013
Last Rating Date: June 1, 2022

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