DBRS Morningstar Confirms Credito Valtellinese at BB (high)/R-3; Trend Remains Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Credito Valtellinese SpA (Creval or the Bank) including the Long-Term Issuer Rating of BB (high) and the Short-Term Issuer Rating of R-3. The trend on all ratings remains stable. The Bank’s Deposit ratings were confirmed at BBB (low)/R-2 (middle), one notch above the Intrinsic Assessment (IA), reflecting the legal framework in place in Italy which has full depositor preference in bank insolvency and resolution proceedings. DBRS Morningstar has also maintained the Bank’s IA at BB (high) and support assessment at SA3.

KEY RATING CONSIDERATIONS
The wide and growing scale of economic and market disruptions resulting from the coronavirus (Covid-19) pandemic will put additional pressure on the Bank’s profitability and balance sheet. The deteriorating operating environment in Italy will likely affect revenues, asset quality and cost of risk. The impact will likely emerge in the coming quarters, whilst the implications for the medium to long-term will depend on the evolution of the outbreak. Downward rating pressure would intensify should the crisis be prolonged.

We will continue to monitor the performance of the Bank, its contingency plans and all measures to support the franchise and customer base, including debt moratoriums. At the same time, we will assess the impact of unprecedented support measures announced by the Italian government, as well as several other international authorities and central banks. Supporting the banks and the economy is a critical factor to withstand the impact of this crisis.

The confirmation of Creval’s Long-Term Issuer Rating at BB (high) and the Stable Trend reflect the Bank’s progress in reducing its large stock of non-performing exposures mostly through sales and securitisations, including two recent disposals in February and March 2020. Asset quality levels now compare relatively well to those of domestic peers, whilst still remaining above the European peer average. However, we believe that the current situation could delay the Bank’s further planned NPE reduction, with Creval planning to reach a gross NPL ratio of around 6% by 2023. We also expect the coronavirus pandemic to increase pressure on the Bank’s risk profile, albeit this could be mitigated by the Italian government and the European authorities’ support measures.

In addition, the rating action incorporates the Bank’s ample capital position, and DBRS Morningstar notes that the Bank has substantial cushions over regulatory requirements. These, combined with the flexibility provided by the regulator on capital buffers, should help the Bank mitigate the expected rise in risk-weighted assets (RWAs) driven by a deterioration in the loan book. The ratings are supported by the Bank’s small national position but solid franchise in the region of Lombardy, especially in the province of Sondrio, as well as in Sicily. However, Lombardy remains one of the most affected regions in Italy by the global coronavirus pandemic, which in our view could pressure the Bank’s franchise. The ratings are underpinned by the Bank’s solid funding and liquidity position, with Creval diversifying its funding mix through a recent return to the unsecured wholesale market. Whilst we do not see short-term downside risk on funding given the ECB’s assistance, we believe that smaller institutions like Creval could experience difficulties in accessing wholesale funding markets. This is however mitigated by the fact that the Bank has relatively little funding needs from the wholesale markets.

The ratings take into account Creval’s modest profitability, mainly due to revenue pressure, the high cost of credit which was impacted in 2019 by extraordinary LLPs related to the NPE disposal plan, and the still high, albeit declining, operating costs. Although the new management team had initiatives to improve profitability, the coronavirus pandemic creates additional risk for the Bank’s revenues, and is expected to lead to weaker lending growth, lower fees and commissions as well as higher loan loss provisions.

RATING DRIVERS
Given the current situation and the implications from the global pandemic, an upgrade is unlikely in the short-term. An upgrade of the Long-Term ratings would require demonstration of sustained profitability, as well as a further improvement in asset quality.

The ratings could be downgraded should the Bank’s profitability materially decline. A downgrade could also occur if much of the progress in asset quality made by the bank were to be reversed or if there was a significant weakening of capital as a result of the coronavirus pandemic.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

The Grid Summary Grades for Credito Valtellinese SpA are as follows: Franchise Strength – Moderate; Earnings – Weak; Risk Profile – Moderate / Weak; Funding & Liquidity – Good/Moderate; Capitalisation – Moderate.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Company Documents, Creval 2019 Presentation, Creval 2019 Press Release and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/359176

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions Group
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: February 7, 2013
Last Rating Date: March 13, 2020

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