Fitch Ratings has affirmed Mediobanca Banca di Credito Finanziario S.p.A's (Mediobanca) Long-Term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook and Viability Rating (VR) at 'bbb'.
A full list of rating actions is below.
Key Rating Drivers
Moderate Risk Profile Drives Ratings: Mediobanca's VR is one-notch above its 'bbb-' implied VR since its risk profile has high influence on the rating. Its moderate risk profile underpins its good operating profitability and sound asset quality through the cycles, also relative to domestic peers with lower-risk traditional commercial business model.
The ratings also reflect a specialised and diversified business model with strong competitive positions in selected businesses, sound capitalisation and a stable funding and liquidity profile.
Niche Business Profile: Mediobanca has well-established franchises in corporate and investment banking (CIB) and consumer lending in Italy, which support profit generation throughout the cycles. The bank's strategy to expand its wealth-management (WM) franchise, mainly in the high net worth client segment, and focus on capital-light CIB activities will improve its business profile through greater contribution of lower-risk businesses with adequate returns.
However, execution remains vulnerable to Italy's operating environment, especially to higher-for-longer interest rates resulting in reduced appetite for WM products. Mediobanca's large consumer lending also exposes the bank to greater risks from debt affordability strains and the higher cost of living, given ongoing inflationary pressures.
Conservative Underwriting, Sound Controls: Mediobanca's operations in higher-risk segments than traditional commercial banks are mitigated by moderately conservative underwriting standards and adequate risk infrastructure. These allow effective control of risks, supporting the bank's performance throughout the cycles and we expect this to continue. In our assessment, we also consider above average borrower concentration levels stemming from the CIB business, albeit performance has proved resilient through the cycle. Mediobanca's risk profile also benefits from lower exposure to Italian government bonds than most of its domestic peers.
Mild Asset Quality Deterioration Expected: Inflows of impaired loans were broadly muted over the past 12 months, despite the challenging operating environment. We expect consumer finance to be more severely affected than other segments from structurally higher rates and inflation. Nevertheless, tightened underwriting and a proactive approach to managing asset quality should result in modest asset quality deterioration. We expect the group gross impaired loans ratio to revert to structural levels close to 3% (end-December 2023: 2.5%) in the next 18 months.
Stable Profitability, Ongoing Structural Improvements: We expect Mediobanca's profitability to remain sound through 2024-2025. The bank should benefit from stable net interest margin, growing fee income, and a manageable increase in operating costs and loan impairment charges. Mediobanca is committed to executing its strategy to expand capital-light revenues in wealth management fees and CIB, helping structural profitability improvements. Nevertheless, these will take time to be fully visible and sustainable.
Sound Capitalisation: Mediobanca's sound capitalisation is underpinned by established internal capital generation throughout the cycles resulting in ample buffer over regulatory minimums. We expect this to continue, although its common equity Tier 1 (CET1) ratio should moderately decrease from current levels (15.3% at end-2023) due to higher shareholder remuneration and business growth, which will be partially offset by risk-weighted assets (RWAs) optimisation.
Stable Funding and Liquidity: The impact of higher interest rates on funding costs has been manageable so far, despite Mediobanca's deposit franchise being less established than at traditional commercial banks in Italy. We expect Mediobanca to maintain a balanced funding and liquidity profile in the medium term, but the bank's increasing focus on higher-end customers could make its deposits more price sensitive. The bank is well-positioned to retain customer savings converting deposits into assets under administration and asset under management.
Mediobanca's well-diversified access to wholesale funding proved resilient to changes in interest rates and market volatility. This allowed a smooth repayment of central bank funding, together with its ample available liquidity, while maintaining sound liquidity indicators.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Mediobanca's largely domestic focus means its ratings are sensitive to a downgrade of Italy's rating, or to a downgrade of our assessment of Italy's operating environment.
The ratings could be downgraded if Mediobanca's risk profile worsened materially, for example, if the bank became more aggressive in its underwriting standards, including in riskier asset classes, which Fitch does not expect.
The ratings could also be downgraded if Mediobanca's CET1 ratio falls towards 13% without the prospect of recovery in the short term. This weakening of capitalisation could be caused by a prolonged damage to the bank's earnings or a sustained increase in its impaired loans ratio sustainably above 4%.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade is currently unlikely and would be contingent upon an Italian sovereign upgrade. This would have to be accompanied by a much stronger business and risk profile (with an impaired loan ratio kept consistently below 2% and operating profit/RWAs at least above 3%), alongside strengthening capitalisation, with a CET1 ratio consistently above 17%.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The long-term deposit rating is one notch above Mediobanca's Long-Term IDR to reflect full depositor preference in Italy and protection from senior and subordinated debt and equity buffers. The uplift also reflects our expectation that the bank will maintain these buffers, given the need to comply with minimum requirement for own funds and eligible liabilities (MREL).
The short-term deposit rating of 'F2' is the baseline option for a long-term deposit rating of 'BBB+' because the funding and liquidity score is not high enough to achieve the higher equivalent short-term rating.
Mediobanca's SNP debt is rated one notch below the Long-Term IDR 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. For the same reason, the SP debt rating is in line with the Long-Term IDR.
The SP debt short-term rating of 'F3' is in line with the Short-Term IDR.
Tier 2 subordinated debt is rated two notches below the VR for loss severity to reflect poor recovery prospects. 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.
Mediobanca's DCR is in line with the Long-Term IDR as derivative counterparties in Italy have no preferential legal status over senior debt in liquidation.
GOVERNMENT SUPPORT RATING (GSR)
Mediobanca's GSR of 'no support' (ns), reflects our view that although external extraordinary sovereign support is possible it cannot be relied upon. Senior creditors can no longer expect to receive full extraordinary support from the sovereign in the event that the bank becomes non-viable. 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 DCR, SP, SNP debt and deposit ratings are primarily sensitive to changes in the bank's Long-Term IDR.
The SP and SNP debt ratings could also be upgraded by one notch if at some point Mediobanca is expected to meet its resolution buffer requirements with SNP and more junior instruments.
The long-term deposit rating is also sensitive to a reduction in the size of the senior and junior debt buffers, although we view this as unlikely in light of Mediobanca's current and future MREL requirements and the sizeable actual buffers versus regulatory requirements.
The Tier 2 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 their non-performance risk relative to that 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.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
The ratings of the SP debt issued by Mediobanca International (Luxembourg) S.A. are equalised with the parent's IDRs, as the debt is unconditionally and irrevocably guaranteed by Mediobanca. Fitch expects the parent to honour this guarantee.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
The ratings of the SP debt issued by Mediobanca International (Luxembourg) S.A. are sensitive to the same factors that affect the SP debt issued by the parent.
VR ADJUSTMENTS
The operating environment score of 'bbb' is below the 'a' implied category score due to the following adjustment reason: sovereign rating (negative)
The funding & liquidity score of 'bbb' is above the 'b and below' category implied score due to the following adjustment reason: non-deposit funding (positive).
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
MEDIOBANCA S.P.A. 
