Credit Opinion: Banco Popolare Società Cooperativa
Global Credit Research - 03 Oct 2014
Verona, Italy
Ratings
Moody's
Rating
Category
Outlook
Negative(m)
Bank Deposits
Ba3/NP
Bank Financial Strength
E+
Baseline Credit Assessment
b3
Adjusted Baseline Credit Assessment
b3
Issuer Rating
Ba3
Senior Unsecured -Dom Curr
Ba3
Senior Subordinate -Dom Curr
(P)Caa1
Jr Subordinate MTN -Dom Curr
(P)Caa2
Tier III MTN -Dom Curr
(P)Caa1
Pref. Stock Non-cumulative -Dom Curr Caa3 (hyb)
Banco Popolare Luxembourg S.A.
Outlook
Bkd Sr Unsec MTN -Dom Curr
Negative
(P)Ba3
Banco Popolare Societa Cooperativa,
London Br
Outlook
Bank Deposits (ST)
Commercial Paper
No Outlook
--/NP
NP
Banca Popolare di Lodi Investor Trust III
Outlook
BACKED Pref. Stock Non-cumulative
Positive
Caa3 (hyb)
Contacts
Analyst
Edoardo Calandro/London
Maria Jose Mori/Madrid
Johannes Wassenberg/London
Monika Kusstatscher/London
Phone
44.20.7772.5454
34.91.768.8200
44.20.7772.5454
Key Indicators
Banco Popolare Societa Cooperativa (Consolidated Financials)[1]
[2]6-14 [3]12-13 [3]12-12 [3]12-11 [3]12-10 Avg.
126,043.9 126,042.7 131,921.4 134,126.6 135,155.7 [4]-1.7
Total Assets (EUR million)
172,573.0 173,679.5 173,924.0 174,115.8 181,317.2 [4]-1.2
Total Assets (USD million)
7,656.9 5,921.4 6,515.0 7,259.6 4,212.2 [4]16.1
Tangible Common Equity (EUR million)
10,483.5 8,159.3 8,589.3 9,423.9 5,650.9 [4]16.7
Tangible Common Equity (USD million)
1.3
1.3
1.4
1.5
1.5 [5]1.4
Net Interest Margin (%)
2.3
2.2
1.9
1.2
1.0 [6]2.3
PPI / Average RWA (%)
0.1
-0.8
-0.8
0.4
0.0 [6]0.1
Net Income / Average RWA (%)
11.0
8.8
10.4
33.4
28.5 [5]18.4
(Market Funds - Liquid Assets) / Total Assets (%)
76.6
76.4
77.5
47.5
55.1 [5]66.6
Core Deposits / Average Gross Loans (%)
11.5
9.2
10.0
8.2
7.2 [6]11.5
Tier 1 Ratio (%)
Tangible Common Equity / RWA (%)
Cost / Income Ratio (%)
Problem Loans / Gross Loans (%)
Problem Loans / (Equity + Loan Loss Reserves) (%)
Source: Moody's
12.8
64.2
15.6
89.5
10.4
64.5
14.7
97.6
10.6
63.1
12.7
90.6
7.9
70.6
10.7
79.5
4.4 [6]12.8
74.3 [5]67.3
9.4 [5]12.6
62.2 [5]83.9
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - transitional phase-in; IFRS
[3] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS reporting periods
have been used for average calculation [6] Basel III - transitional phase-in & IFRS reporting periods have been
used for average calculation
Opinion
SUMMARY RATING RATIONALE
Banco Popolare's (Banco) Ba3 long-term debt and deposit ratings benefit from three-notch uplift from the bank's
b3 standalone baseline credit assessment (BCA) based on our assessment of a high probability of systemic
support.
The bank's standalone financial strength rating (BFSR) of E+ to Banco, which maps to a BCA of b3, reflects the
very significant pressure on Banco's asset quality and profitability. The BCA also positively reflects the bank's
strengthened capital adequacy, ongoing ability to generate pre-provision income, and strengthened funding
flexibility outside of central bank funding.
Rating Drivers
- Asset quality is below average and expected to deteriorate
- Modest profitability
- Strengthened capital adequacy
Rating Outlook
The negative outlook on the deposit ratings takes into account the recent adoption of the Bank Recovery and
Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) regulation in the EU. In particular, this
reflects that, with the legislation underlying the new resolution framework now in place and the explicit inclusion of
burden-sharing with unsecured creditors as a means of reducing the public cost of bank resolutions, the balance
of risk for banks' senior unsecured creditors has shifted to the downside. Although our support assumptions are
unchanged for now, the probability has risen that they will be revised downwards to reflect the new framework. For
further details, please refer to our Special Comment entitled "Reassessing Systemic Support for EU Banks,"
published on 29 May 2014.
The outlook is positive on the standalone ratings, reflecting the completed capital increase.
What Could Change the Rating - Up
The deposit rating could be upgraded following a raise of the standalone BCA, and if we remain comfortable with
three notches of systemic support in light of bail-in legislation.
The BCA could be raised if the bank is able to show a return to net profitability (around 0.5% of risk-weighted
assets) during 2014, after two years of losses, and reduce or stabilise its high problem loans.
What Could Change the Rating - Down
A reduction of systemic support assumptions could lead to a downgrade of the deposit rating.
The outlook on the standalone BFSR could stabilise if the bank fails to strengthen profitability or at least stabilise
its asset quality.
DETAILED RATING CONSIDERATIONS
ASSET QUALITY IS BELOW AVERAGE AND EXPECTED TO DETERIORATE
Gross problem loans (see notes 1 and 2 at the end of this report) were 15.6% of loans in June 2014 (15% as at
December 2013), compared to the latest available Italian average of 12% as at December 2013 . The coverage of
problem loans with loan loss reserves remained below average at 40% (against 59% Italian average at December
2014) excluding write-offs and personal guarantees; this is however mitigated by:
- Banco's higher real estate collateral than average and higher leasing, were recovery is easier
- a recent inspection by the Bank of Italy in 2013
- the bank's 2011-2013 track record of NPL recovery slightly above book value
Going forward, we believe that problem loans - and particularly NPLs within them - will increase until 2015 and loan
loss charges will remain elevated, considering:
- the bank's still significant - albeit reducing - concentration towards the real estate sector, also in terms of largest
problem loans and repossessed assets. As the crisis progresses and real estate prices fall, this will likely result in
still significant provisions
- our projections for Italian GDP growth in a range between -0.5% and +0.5% in 2014 and between 0% and 1% in
2015
- the time lag of asset impairments
- a high EUR1.5 billion million net flow of problem loans in 1H 2014, above the EUR1.3 billion net inflow in 1H 2013
(+16%)
A possible sale of problem loans has been postponed, and a revised strategy is being developed.
MODEST PROFITABILITY
Banco's underlying performance was satisfactory, with an annualised 2.5% PPI over risk-weighted assets and a
61% cost-to-income in 1H 2014.
The bank reported an unexpected net loss of EUR606 million in December 2013. The net loss was primarily
generated by net loan loss provisions to EUR1.7 billion (EUR1.3 billion in 2012) and, to a lesser extent, by nonoperating costs. Provisions were significantly higher than previously envisaged by the bank, as a result of an
inspection by the Bank of Italy. The regulator recommended, among other things, provisions for non-performing
forborne exposures -- a new class of problem loans introduced by the European Banking Authority in October
2013.
In 1H 2014 the bank reported a break-even of EUR2 million (EUR169 million in 1H 2013), reflecting a still very high
cost of risk (147 bp on an annualised basis, which compares with 96 bp in 1H 2013 and 193 bp in 2013).
The combination of low revenues (low interest rates, subdued loan growth, low risk propensity of clients) and high
cost of credit leads us to believe that internal capital generation in 2014 will remain modest or negative.
STRENGTHENED CAPITAL ADEQUACY
Banco was one the banks which were reviewed by the ECB as part of its comprehensive assessment, which
consisted of a supervisory judgment on key risks, an asset quality review (AQR) alongside a stress test, the
result of were published in October 2014. Using data as at December 2013, the comprehensive assessment
showed an aggregate capital shortfall of EUR693 million; the bank has already fully covered this shortfall in 2014
through the raising of capital instruments eligible as CET1 capital of EUR1,756 million as reported by the ECB, and
additional EUR120 million as reported by the Bank of Italy.
Banco completed a share issue of EUR1.5 billion in 1H 2014, increasing the pro-forma fully-loaded Basel III CET1
ratio to 11.4% (13.5% phased-in), including the benefits of the upcoming and already approved merger with
Banco's fully owned subsidiary Banca Italease (rated E+/b3, Ba3). We believe that the bank is in a stronger
position ahead of the ECB's comprehensive assessment, reducing the risk for further corrective actions and thus
the risk for bondholders.
Global Local Currency Deposit Rating (Joint Default Analysis)
We assign deposit and debt ratings of Ba3 to Banco. The ratings incorporate the bank's standalone BCA of b3 and
our assessment of a high probability of systemic support for the bank in case of need, which results in a threenotch uplift from the standalone BCA to the deposit and debt ratings.
Notching Considerations
Subordinated debt and hybrid ratings are notched off the b3 BCA with senior subordinated debt and Tier III rated
Caa1, junior subordinated debt at Caa2 and preferred stock at Caa3.
(Note 1) Unless noted otherwise, data in this report is sourced from company reports, press releases,
presentations and Moody's Banking Financial Metrics.
(Note 2) Problem loans include non-performing loans (sofferenze), watchlist (incagli), restructured (ristrutturati),
and past-due (scaduti); Moody's adjusts these numbers and only incorporates 30% of the watchlist category as an
estimate of those over 90 days overdue.
ABOUT MOODY'S BANK RATINGS
Bank Financial Strength Rating
Moody's Bank Financial Strength Ratings (BFSRs) represent Moody's opinion of a bank's intrinsic safety and
soundness and, as such, exclude certain external credit risks and credit support elements that are addressed by
Moody's Bank Deposit Ratings. Bank Financial Strength Ratings do not take into account the probability that the
bank will receive such external support, nor do they address risks arising from sovereign actions that may
interfere with a bank's ability to honor its domestic or foreign currency obligations. Factors considered in the
assignment of Bank Financial Strength Ratings include bank-specific elements such as financial fundamentals,
franchise value, and business and asset diversification. Although Bank Financial Strength Ratings exclude the
external factors specified above, they do take into account other risk factors in the bank's operating environment,
including the strength and prospective performance of the economy, as well as the structure and relative fragility of
the financial system, and the quality of banking regulation and supervision.
Global Local Currency Deposit Rating
A deposit rating, as an opinion of relative credit risk, incorporates the Bank Financial Strength Rating as well as
Moody's opinion of any external support. Specifically, Moody's Bank Deposit Ratings are opinions of a bank's
ability to repay punctually its deposit obligations. As such, Moody's Bank Deposit Ratings are intended to
incorporate those aspects of credit risk relevant to the prospective payment performance of rated banks with
respect to deposit obligations, and includes: intrinsic financial strength, sovereign transfer risk (in the case of
foreign currency deposit ratings), and both implicit and explicit external support elements. Moody's Bank Deposit
Ratings do not take into account the benefit of deposit insurance schemes which make payments to depositors,
but they do recognize the potential support from schemes that may provide assistance to banks directly.
According to Moody's joint default analysis (JDA) methodology, the global local currency deposit rating of a bank
is determined by the incorporation of external elements of support into the bank's Baseline Risk Assessment. In
calculating the GLC rating for a bank, the JDA methodology also factors in the rating of the support provider, in the
form of the local currency deposit ceiling for a country, Moody's assessment of the probability of government
support for the bank in case a stress situation occurs and the degree of dependence between the issuer rating
and the LCDC.
Foreign Currency Deposit Rating
Moody's ratings on foreign currency bank obligations derive from the bank's local currency rating for the same
class of obligation. The implementation of JDA for banks can lead to a high local currency ratings for certain
banks, which could also produce high foreign currency ratings. Nevertheless, it should be reminded that foreign
currency deposit ratings are in all cases constrained by the country ceiling for foreign currency bank deposits.
This may result in the assignment of a different, and typically lower, rating for the foreign currency deposits relative
to the bank's rating for local currency obligations.
Foreign Currency Debt Rating
Foreign currency debt ratings are derived from the bank's local currency debt rating. In a similar way to foreign
currency deposit ratings, foreign currency debt obligations may also be constrained by the country ceiling for
foreign currency bonds and notes, however, in some cases the ratings on foreign currency debt obligations may
be allowed to pierce the foreign currency ceiling. A particular mix of rating factors are taken into consideration in
order to assess whether a foreign currency bond rating pierces the country ceiling. They include the issuer's
global local currency rating, the foreign currency government bond rating, the country ceiling for bonds and the
debt's eligibility to pierce that ceiling.
About Moody's Bank Financial Strength Scorecard
Moody's bank financial strength model (see scorecard below) is a strategic input in the assessment of the financial
strength of a bank, used as a key tool by Moody's analysts to ensure consistency of approach across banks and
regions. The model output and the individual scores are discussed in rating committees and may be adjusted up or
down to reflect conditions specific to each rated entity.
Rating Factors
Banco Popolare Societa Cooperativa
Rating Factors [1]
Qualitative Factors (50%)
Factor: Franchise Value
Market share and sustainability
Geographical diversification
Earnings stability
Earnings Diversification [2]
Factor: Risk Positioning
Corporate Governance [2]
A
B
C
D
E
Total Score
CC-
Trend
x
x
x
D+
- Ownership and Organizational Complexity
- Key Man Risk
- Insider and Related-Party Risks
Controls and Risk Management
--
--
--
--
--
- Risk Management
- Controls
---
---
---
---
---
Financial Reporting Transparency
x
- Global Comparability
- Frequency and Timeliness
- Quality of Financial Information
x
x
Credit Risk Concentration
--
--
--
--
--
- Borrower Concentration
- Industry Concentration
---
---
---
---
---
Liquidity Management
Market Risk Appetite
Factor: Operating Environment
Economic Stability
Integrity and Corruption
Legal System
Financial Factors (50%)
Factor: Profitability
PPI % Average RWA (Basel II)
Net Income % Average RWA (Basel II)
Factor: Liquidity
(Market Funds - Liquid Assets) % Total Assets
Liquidity Management
Factor: Capital Adequacy
x
x
x
D
Neutral
D
D
Neutral
D-
Neutral
B+
Improving
x
x
x
1.76%
-0.41%
30.53%
x
Tier 1 Ratio (%) (Basel II)
Tangible Common Equity % RWA (Basel II)
Factor: Efficiency
Cost / Income Ratio
Factor: Asset Quality
Problem Loans % Gross Loans
Problem Loans % (Equity + LLR)
Lowest Combined Financial Factor Score (15%)
Economic Insolvency Override
Aggregate BFSR Score
Aggregate BCA Score
Assigned BFSR
Assigned BCA
9.11%
9.62%
D
Neutral
E
Weakening
66.03%
12.71%
89.22%
E
Neutral
D+
baa3/ba1
E+
b3
[1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.
[2] - A blank score under Earnings Diversification or Corporate Governance indicates the risk is neutral.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication,
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