BPER BANCA 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 BPER's progress in executing its impaired loan reduction strategy, resulting in a significant improvement in asset quality to levels that are closer to international averages and a reduction in capital encumbrance from unreserved impaired loans. These improvements have considerably reduced BPER's vulnerability to asset-quality shocks in
The upgrade also considers the bank's strengthened franchise in
Key Rating Drivers
Strengthened Franchise, Improved Fundamentals: BPER's ratings reflect its improved domestic franchise in
Consistent Strategic Execution: BPER pursues a clear medium-term strategy that is consistent with its business model. Over the past two years BPER has strengthened its franchise, especially in the wealthy region of
The bank also accelerated its reduction of impaired loans, achieving its 2025 targets ahead of plan in 2022. In 2023, we expect the bank to continue its internal rationalisation and to extract synergies from its enlarged branch network.
Sound Risk Profile, Sovereign Exposure: BPER's underwriting and risk controls are commensurate with the bank's business profile and adequate for meeting higher business volumes resulting from the two recent acquisitions. Our assessment of its risk profile also considers the bank's large exposure to Italian sovereign risk, albeit less than other domestic second-tier banks', with government bonds accounting for close to 1.5x the bank's common equity Tier 1 (CET1) capital at end-2022.
Average Asset Quality: BPER's impaired loans ratio has more than halved from end-2020 to just above 3% at end-2022, owing to the significant reduction in impaired loans and a benign economic environment. Fitch expects the group to maintain its impaired loans ratio at below 4% in 2023, despite an expected economic slowdown in
Our expectation considers planned disposals but also write-offs, an improved workout, better underwriting, and strengthened control over new inflows of impaired loans.
Moderate Earnings Capacity: BPER's revenue is adequately diversified with fees and commissions contributing about 42% of total operating income during the past five years, which compares well with that of the most diversified banks in
We expect BPER to gradually improve its below-average operating profit towards 1.5% of risk-weighted assets (RWAs) over the next three years. This will be underpinned by growth in core revenue, which benefits from synergies with newly integrated entities; stable operating costs; and strengthened control on loan impairment charges.
Adequate Capital Buffers: We expect the bank to maintain adequate capital buffers above regulatory requirements, on the back of improving internal capital generation. In the medium term, we expect BPER to operate with a CET1 ratio of around 13%. Capital encumbrance by unreserved impaired loans of 8% at end-2022 has halved from a year earlier and is almost in line with stronger domestic peers' and international standards. We expect it to stabilise at below 10% as the bank progresses with its planned disposals of impaired loans for 2023.
Sound Funding Profile: Our assessment of BPER's funding and liquidity considers an ample and growing customer deposit base, an adequately diversified funding profile and its sound liquidity. Customer deposits account for about a high 80% of BPER's total funding. Access to wholesale channels remains less frequent than for larger and higher-rated peers, although the diversification of its liability structure, particularly for unsecured debt, has been improving.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
BPER's ratings are vulnerable to a significant weakening of the operating environment in
Specifically, the ratings would likely be downgraded if the impaired loans ratio increases above 6% and operating profitability remains below 1% of RWAs on a sustained basis, especially if the CET1 ratio falls below 13% without the prospect of recovery in the short term, and capital encumbrance by unreserved impaired loans rises on a sustained basis.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside to the ratings is currently limited given BPER's business profile unless the bank's financial metrics improve significantly. In particular, over the longer run, an upgrade would require both the operating profit to rise to about 2% of RWAs sustainably without increasing the bank's risk appetite and the impaired loans ratio to remain consistently below 3%, while maintaining the CET1 ratio at least at 13%.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
DEPOSIT RATINGS
BPER's long-term deposit rating is one notch above its Long-Term IDR because the bank has sufficient combined buffers of junior and senior debt, resulting in a lower probability of default on deposits than its Long-Term IDR. The one-notch uplift also reflects our expectation that the bank will maintain sufficient buffers to comply with minimum requirement for own funds and eligible liabilities (MREL).
The short-term deposit rating of 'F3' is the lower of two short-term ratings mapping to a 'BBB' long-term deposit rating on Fitch's rating scale, because the funding and liquidity score is not high enough to achieve a higher equivalent short-term rating.
SENIOR PREFERRED (SP) AND SENIOR NON-PREFERRED (SNP) DEBT
BPER's SP debt is rated in line with the bank's Long-Term IDR because we expect the bank to use SP debt to meet its MREL. For the same reason, BPER's SNP notes are rated one notch below the bank's Long-Term IDR. This is to reflect the risk of below-average recoveries arising from the use of SP debt to meet resolution buffer requirements, and the combined buffer of additional Tier 1, Tier 2 and SNP debt being unlikely to exceed 10% of RWAs.
SUBORDINATED DEBT
The subordinated debt of BPER is notched down twice from its VR for loss severity to reflect poor recovery prospects in a resolution. No notching is applied for incremental non-performance risk because a 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.
No Support: BPER's Government Support Rating (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 nonviable. This is because the EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that requires senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The SP, SNP senior debt and deposit ratings are primarily sensitive to changes in BPER's IDRs.
BPER's SP and SNP ratings could also be upgraded by one notch if we expect the bank to meet the resolution buffer requirements of the consolidated entity exclusively with SNP and more junior instruments, or if we expect resolution buffers represented by SNP and more junior instruments to be at least 10% of RWAs on a sustained basis.
The deposit ratings could be downgraded by one notch, and be aligned with the IDRs, in the event of a reduction in the size of the senior and junior debt buffers that would result in a lower protection to deposits, although we view this unlikely in light of current and future MREL requirements.
BPER's subordinated debt rating is primarily sensitive to changes in the bank's VR, from which it is notched. The rating is also sensitive to a change in the notes' notching, which could arise if Fitch changes its assessment of its non-performance relative to the risk captured in the VR or its expected loss severity.
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 asset quality score of 'bbb-' is above the 'bb' category implied score due to the following adjustment reason: historical and future metrics (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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 the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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