BANCA MONTE DEI PASCHI DI SIENA S.P.A.
Fitch Ratings has upgraded
The Outlook on the Long-Term IDR is Stable. A full list of rating actions is detailed below.
The upgrade reflects the bank's successful restructuring, which has allowed it to structurally restore sound capital buffers and strengthen its operating profitability. The upgrade also reflects evidence that MPS has regained customer confidence - which underpins stability in its deposit base - and its ability to issue on the wholesale markets after a long absence.
The Stable Outlook reflects Fitch's expectation that the bank's ratings have sufficient headroom to absorb the impact of economic slowdown and inflation on asset quality, while maintaining adequate operating profitability despite the expectation of a decreasing net interest margin.
Key Rating Drivers
Turnaround in Progress: MPS's ratings reflect the bank's progress in restoring its franchise in
Stabilised Franchise, Simplified Business: The successful completion of MPS's recapitalisation and staff lay-off plan in 2022 put the bank in good stead to defend its market position in
Reduced Risk Appetite: Fitch believes that MPS's risk appetite has structurally changed. However, the bank's tightened underwriting standards and improved risk controls are yet to be tested throughout the economic and interest-rate cycles. MPS is moderately exposed to interest-rate risk, but sensitivity is adequately managed.
Encumbrance of Italian government bonds has been reduced materially but it is still high by international standards. Losses from legacy legal claims remain potentially large, but MPS is reducing this risk and built some provisions.
Asset Quality Under Control: MPS's impaired loan ratio has improved modestly over the past three years to the lowest level in a decade but remains above domestic and international averages. We see some headroom to absorb deterioration of impaired loans in 2024, which we expect to be manageable given reduced risk appetite and limited business generation in recent years. Comfortable loan loss provisioning and use of state-guaranteed, further mitigate the risk of large inflows of new impaired loans.
Structural Profitability Restored: Operating profitability has been improving since end-2021 on the back of higher interest rates, but also leaner operating costs, lower recurring loan impairment charges (LICs) than in the past and a gradual recovery in revenue generation. All these will continue to structurally support MPS's performance and an operating profit at close to 2% of risk-weighted assets (RWAs) in 2024-2025. However, a full turnaround in MPS's profitability is contingent on the bank maintaining strong fundamentals throughout the economic cycle and a normalisation of the interest-rate environment.
Comfortable Capital Buffers: MPS is maintaining sound regulatory capital buffers since its recapitalisation in 2022 due to tightened risk appetite and recovering organic capital generation. Capitalisation is sufficient to withstand expected asset-quality deterioration but remains exposed to significant, although declining, risks from pending legal claims and its domestic sovereign bonds portfolio.
We expect the bank to maintain its regulatory capital comfortably above its stated medium-term objective of above 14% despite plans to pay dividends in the near future. However, its internal capital generation throughout the cycle is not fully tested yet.
Stable Deposits, Improved Market Access: MPS's granular and broadly stable customer deposit base, its improved liquidity buffers and access to wholesale markets underpin the bank's strengthened funding and liquidity profile. The bank has reduced
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The ratings could be downgraded if the bank fails to achieve a full turnaround with an operating profitability falling below 1% of RWAs and its impaired loans ratio rising structurally above 6%, putting pressure on its regulatory capital buffers without prospects of a recovery in the short term.
Ratings pressure could also arise if the bank's funding and liquidity deteriorates materially, for example, by means of reduced buffers of liquidity, an unsustainable increase in the cost of funding, failure to access wholesale markets or sustained deterioration in its loans/deposits ratio. The ratings remain also sensitive to large unexpected cost items, such as from pending legal claims.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of MPS's ratings would require evidence of structural improvements achieved to date to be maintained over the medium-to-long term. This would include a resilient business model generating an operating profit/RWAs ratio of at least 1.5%throughout the economic and interest-rate cycles and, an impaired loans ratio structurally below 4%.
An upgrade would also require a common equity Tier 1 ratio being maintained at least in line with MPS's medium-term target of above 14% and a stable the operating environment in
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Long-term deposits are rated one notch above the Long-Term IDR because of full depositor preference in
Senior preferred (SP) obligations are rated in line with the bank's Long-Term IDR to reflect that the likelihood of default on any given SP obligation is the same as that of the bank and their average recovery prospects.
MPS's senior non-preferred (SNP) debt is rated one notch below the bank's Long-Term IDR to reflect the risk of below-average recovery prospects. Below-average recovery prospects arise from the use of more senior debt to meet resolution buffer requirements and from the combined buffer of Tier 2 and SNP debt being unlikely to exceed 10% of RWAs.
MPS's Tier 2 subordinated debt is rated two notches below the VR for loss severity to reflect poor recovery prospects in a resolution. No notching is applied for incremental non-performance risk because write-down of the notes will only occur once the point of non-viability is reached and there is no coupon flexibility before non-viability.
Government Support Rating (GSR)
MPS's GSR of 'no support' (ns) reflects Fitch's view that although external extraordinary sovereign support is possible it cannot be relied on. Senior creditors can no longer expect to receive full extraordinary support from the sovereign in the event that the bank becomes non-viable.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The SP, SNP and long-term deposit ratings are primarily sensitive to changes in the bank's Long-Term IDR, from which they are notched.
The long-term deposit rating could be downgraded by one notch on a reduction in the size of the senior and junior debt buffers, although we view this unlikely in light of MPS's current and future MREL requirements.
The SP and SNP ratings could be upgraded if the bank is expected to meet its resolution buffer requirements exclusively with SNP debt and more junior instruments or if SNP and more junior resolution debt buffers exceed 10% of RWAs on a sustained basis, both of which we view unlikely.
The subordinated debt rating is sensitive to changes in the bank's VR, from which it is notched. It is also sensitive to a change in the notes' notching, which could arise if Fitch changes its assessment of their non-performance relative to the risk captured in the VR.
An upgrade of the GSR would be contingent on a positive change in the sovereign's propensity to support the bank. In Fitch's view, this is highly unlikely, although not impossible.
VR ADJUSTMENTS
The business profile score of 'bb' is below the 'bbb' implied category score due to the following adjustment reason: business model (negative).
The earnings & profitability score of 'bb-' is above the 'b & below' implied category score due to the following adjustment reason: historical and future metrics (positive).
The capitalisation and leverage score of 'bb' is below the 'bbb' implied category score due to the following adjustment reasons: internal capital generation and growth (negative) and capital flexibility and ordinary support (negative).
The funding and liquidity score of 'bb' is below the 'bbb' implied category score due to the following adjustment reason: non-deposit funding (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on MPS, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in a rating decision. For more information on Fitch's ESG Relevance Scores, see www.fitchratings/esg.
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