centrale banca del mezzogiorno - mediocredito · 2018. 12. 3. · banca del mezzogiorno - mcc...

FINANCIAL INSTITUTIONS

CREDIT OPINION10 February 2017

Update

RATINGS

Banca del Mezzogiorno - MCC S.p.A.Domicile Rome, Italy

Long Term Deposit Baa3

Type LT Bank Deposits - Fgn Curr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Rachele Botta 44-20-7772-1524Associate [email protected]

Edoardo Calandro [email protected]

Carlo Gori 44-20-7772-1076VP-Senior [email protected]

Valentino Balletta 44-20-7772-1744Associate [email protected]

Alain Laurin 33-1-5330-1059Associate [email protected]

Nick Hill 33-1-5330-1029Managing Director [email protected]

Banca del Mezzogiorno - MedioCreditoCentraleSemiannual Update

Summary Rating RationaleBanca del Mezzogiorno - Mediocredito Centrale's (BdM) Baa3 long-term deposit ratingreflects its standalone creditworthiness as well as extremely low loss-given-failure.

BdM's ba3 standalone baseline credit assessment (BCA) reflects the bank's moderatealthough unseasoned asset risk, strong capital, lack of independent funding and changingstrategy.

On 9 February 2017 the parent Poste Italiane (Poste, Baa2 negative), the state-owned Italianpost office, announced the transfer of the bank to direct government ownership, with thesale to Italy's public development agency Invitalia for €390 million. The transaction is subjectto approval by the Ministry of Economic Development, the Bank of Italy and the ECB within3 months.

Exhibit 1

Rating Scorecard - Key Financial Ratios

Source: Moody's Financial Metrics

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1059170

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit Strengths

» Moderate although unseasoned asset risk

» Strong capital

Credit Challenges

» Lack of independent funding

» Changing strategy

Rating OutlookBdM's ratings have a stable outlook, reflecting the still fragile economic recovery in Italy. We expect Italian GDP to grow by around0.8% in 2017 and 1% in 2018.

Factors that Could Lead to an UpgradeSome upward pressure on the standalone BCA would result from a track record of successful implementation of the bank's strategywhile maintaining a satisfactory risk profile. Higher BCA or changes in the liability structure, with increased volumes or subordination ofliabilities, could result in higher deposit rating.

Factors that Could Lead to a DowngradeA lowering of the BCA could result from a material weakening of the bank's solvency or liquidity profile. A downgrade change in thedeposit rating could result from a lower BCA or a smaller cushion of senior debt, or if there were a change in the legal hierarchy whichincreased the risk to these instruments.

Key Indicators

Exhibit 2

Banca del Mezzogiorno - MCC S.p.A. (Unconsolidated Financials) [1]6-162 12-152 12-142 12-133 12-123 Avg.

Total Assets (EUR million) 2,567.5 2,554.4 2,298.5 1,335.2 933.8 28.84

Total Assets (USD million) 2,852.4 2,774.9 2,781.3 1,839.8 1,231.1 23.44

Tangible Common Equity (EUR million) 411.1 423.7 424.5 153.2 142.0 30.44

Tangible Common Equity (USD million) 456.7 460.3 513.7 211.1 187.1 25.04

Problem Loans / Gross Loans (%) 4.6 2.7 1.3 0.9 1.3 2.25

Tangible Common Equity / Risk Weighted Assets (%) 30.3 30.8 26.9 16.7 25.6 29.36

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 16.5 9.4 4.0 4.4 2.0 7.35

Net Interest Margin (%) 1.6 2.0 2.4 1.9 1.5 1.95

PPI / Average RWA (%) 3.9 3.6 4.2 3.3 3.5 3.96

Net Income / Tangible Assets (%) 1.0 1.3 1.6 0.9 0.8 1.15

Cost / Income Ratio (%) 44.7 45.3 40.0 62.2 69.3 52.35

Market Funds / Tangible Banking Assets (%) 62.5 66.8 65.8 61.9 78.8 67.25

Liquid Banking Assets / Tangible Banking Assets (%) 32.1 33.3 34.7 34.1 62.3 39.35

Gross loans / Due to customers (%) 309.8 404.3 425.2 248.1 872.1 451.95

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate basedon IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used foraverage calculationSource: Moody's Financial Metrics

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 10 February 2017 Banca del Mezzogiorno - MedioCredito Centrale: Semiannual Update


Detailed Rating ConsiderationsMODERATE ALTHOUGH UNSEASONED ASSET RISKWe view BdM's asset risk profile as moderate (scoring ba3) because, although problem loans1 are low at 4.6%2 (baa3) of gross loans asof June 2016, they will undoubtedly increase with the seasoning of loans.

In 2012 BdM saw a change in management; following this change, by December 2015 the bank's loan book had grown to €1.6 billion(from €0.2 billion in 2012). As a start-up, BdM lacks a track record for its performance through a full credit cycle.

BdM's level of problem loans is very low, following the spin-off of most of the bank's lending activities before being sold to Poste. Ourassigned score is three notches lower than the macro-adjusted score of baa3, driven by concentration to the construction and realestate sector as well as our expectation in deterioration of loans. Going forward, there is uncertainty on the likely risk profile of the loanportfolio, considering BdM's untested risk management practices. The bank's loan book grew by 16% in 2015 and is expected to growthabove 25% thereafter, in a market where loans are still declining. It continues to target corporate and retail clients in prevalence insouthern Italy (including projects and subsidiaries of companies outside southern Italy), when the economy is significantly weaker thanthe rest of the country.

STRONG CAPITALFollowing a €232 million capital increase, fully subscribed to by Poste in 2014, the bank's tangible common equity (TCE) increasedto a strong 30.3% of adjusted risk-weighted assets as of June 2016. It is important to note however that we expect annual growth inlending of over 25%, which will in time partially erode the benefit of this capital injection, hence our view of baa1 on the bank's capital(consistent with a 13% TCE ratio in the medium term) compared to a macro-adjusted score of a1. At present BdM has not publiclydisclosed its medium term capital targets.

Net profit decreased to €26 million in the first half of 2016 (€39 million in the first half of 2015), as loan loss provisions from theunseasoned loan portfolio slightly increased with a cost of risk of 61 basis points in H1 2016 compared to 34 basis points in H1 2015.With the seasoning of loans, our opinion on future profitability is reflected in the ba2 assigned score, below the macro-adjusted scoreof baa2.

LACK OF INDEPENDENT FUNDINGThe bank's funding plan under direct government ownership (see changing strategy below) is yet to be disclosed.

The business plan guidelines published in July 2015 target independent funding sources - in addition to funding from Poste that willnow cease -such as securitisation when the loan book is more seasoned.

We however believe it would be challenging for BdM to tap the unsecured capital markets at attractive rates, hence we assign a scoreof ba3 to the bank's liquidity profile.

CHANGING STRATEGYWe assign a BCA of ba3, compared to a ba2 financial profile, to reflect the bank's changing mission and strategy over the years.

Under direct government ownership, over time the bank will become a development bank for Southern Italy. The bank will supportproduction investments by corporates, and SME in particular, and public investment in development.

This was the original aim of the acquisition of BdM by Poste in 2011 from UniCredit, part of a project by the Italian Ministry ofEconomy and Finance, under which BdM was to act as the vehicle for providing lending and guarantees to SMEs in the less developedregions of Southern Italy. This can now be more easily pursued under Invitalia, which has the aim to support Italy's competitiveness, inparticular in Southern Italy and sectors for development. The integration of growth policies and financial instruments is a widespreadpractice in other European countries.

This mission did not develop because the lending business was not strategic for the Poste group. A disposal of BdM could not be agreedand in July 2015 BdM published summary guidelines of its 2015-17 business plan, envisaging synergies with Poste group, loan growthabove 20% in Southern Italy and development of independent funding sources.



Notching ConsiderationsAffiliate SupportOur current expectation is that the probability of government support is low, and results in no uplift to the adjusted BCA.

Loss Given FailureBdM is subject to the EU Bank Recovery and Resolution Directive (BRRD), which we consider to be an Operational Resolution Regime.Our analysis assumes residual tangible common equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-offin “junior” wholesale deposits, a 5% run-off in preferred deposits and 26% junior deposits over total deposits. These are in line with ourstandard assumptions. Furthermore, we take into account full 'depositor preference' whereby junior deposits are preferred over seniordebt creditors in accordance with a law decree introducing full depositor preference in Italy starting from 2019.

We believe that BdM's deposits are likely to face extremely low loss-given-failure, due to the loss absorption provided by the residualequity that we expect in resolution and senior unsecured debt, as well as the volume of deposits themselves. This is supported by thecombination of deposit volume and subordination. This results in an uplift of three notches from the bank's ba3 BCA.

Government SupportWe assume a low probability of government support given the bank's modest size. This results in no uplift to the bank's rating.

Counterparty Risk AssessmentThe CR Assessment is positioned at Baa3(cr).

The CR Assessment is positioned three notches above the Adjusted BCA of ba3, based on the cushion against default provided to thesenior obligations represented by the CR Assessment by subordinated instruments amounting to 21% of Tangible Banking Assets.The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures theprobability of default on certain senior obligations, rather than expected loss, therefore we focus purely on subordination and take noaccount of the volume of the instrument class.

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or depositinstruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performanceobligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.



Rating Methodology and Scorecard Factors

Exhibit 3

Banca del Mezzogiorno - MCC S.p.A.Macro FactorsWeighted Macro Profile Moderate

+100%

Financial ProfileFactor Historic

RatioMacro

AdjustedScore

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 4.6% baa3 ↓ ↓ ba3 Unseasoned risk Sector concentration

CapitalTCE / RWA 30.3% a1 ↓ ↓ baa1 Expected trend

ProfitabilityNet Income / Tangible Assets 1.0% baa2 ↓ ↓ ba2 Expected trend

Combined Solvency Score baa1 ba1LiquidityFunding StructureMarket Funds / Tangible Banking Assets 66.8% caa2 ← → b3 Market

funding qualityLiquid ResourcesLiquid Banking Assets / Tangible Banking Assets 33.3% baa1 ↓ baa2 Expected trend

Combined Liquidity Score b1 ba3Financial Profile ba2

Business Diversification 0Opacity and Complexity 0Corporate Behavior -1

Total Qualitative Adjustments -1Sovereign or Affiliate constraint: Baa2Scorecard Calculated BCA range ba2-b1Assigned BCA ba3Affiliate Support notching 0Adjusted BCA ba3

Balance Sheet in-scope(EUR million)

% in-scope at-failure(EUR million)

% at-failure

Other liabilities 1,593 62.1% 1,647 64.2%Deposits 525 20.5% 471 18.4%

Preferred deposits 389 15.1% 369 14.4%Junior Deposits 137 5.3% 102 4.0%

Senior unsecured bank debt 371 14.5% 371 14.5%Equity 77 3.0% 77 3.0%Total Tangible Banking Assets 2,566 100% 2,566 100%



De jure waterfall De facto waterfall NotchingDebt classInstrumentvolume +

Subordination

Sub-ordination

Instrumentvolume +

Subordination

Sub-ordination

De jure De factoLGF

notchingguidance

versusBCA

AssignedLGF

notching

Additionalnotching

PreliminaryRating

Assessment

Counterparty Risk Assessment 21.4% 21.4% 21.4% 21.4% 3 3 3 3 0 baa3 (cr)Deposits 21.4% 3.0% 21.4% 17.5% 2 3 3 3 0 baa3

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Assessment 3 0 baa3 (cr) 0 Baa3 (cr) --Deposits 3 0 baa3 0 Baa3 Baa3Source: Moody's Financial Metrics

Ratings

Exhibit 4Category Moody's RatingBANCA DEL MEZZOGIORNO - MCC S.P.A.

Outlook StableBank Deposits Baa3/P-3Baseline Credit Assessment ba3Adjusted Baseline Credit Assessment ba3Counterparty Risk Assessment Baa3(cr)/P-3(cr)

PARENT: POSTE ITALIANE S.P.A.

Outlook NegativeIssuer Rating Baa2Senior Unsecured -Dom Curr Baa2ST Issuer Rating P-2

Source: Moody's Investors Service

Endnotes1 Problem loans is the sum of three categories (from worst to best): (1) Bad loans (in Italian, “sofferenze”: loans to insolvent borrowers; (2) Unlikely to

pay (in Italian, “inadempienze probabili”); (3) Past Due (in Italian, “esposizioni scadute e/o sconfinanti deteriorate: past due by more than 90 days. Forfurther details please refer to our Sector In-Depth entitled “Italian Banks Implement New Problem Loan Definition; Our View on Asset Risk Is Unchanged”,published in October 2015

2 Unless otherwise noted, data in this report is sourced from company reports and Moody's Banking Financial Metrics


https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1008063


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centrale banca del mezzogiorno - mediocredito · 2018. 12. 3. · banca del mezzogiorno - mcc...

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