Italy-Based Veneto Banca 'BB/B' Ratings Affirmed On Results Of ECB Review; Outlook Remains Negative

Transcription

1 Research Update: Italy-Based Veneto Banca 'BB/B' Ratings Affirmed On Results Of ECB Review; Outlook Primary Credit Analyst: Francesca Sacchi, Milan (39) ; Secondary Contact: Luigi Motti, Madrid (34) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List OCTOBER 30, Standard & Poor's. All rights reserved. No reprint or dissemination without S&P s permission. See Terms of Use/Disclaimer on the last page.

2 Research Update: Italy-Based Veneto Banca 'BB/B' Ratings Affirmed On Results Of ECB Review; Outlook Remains Negative Overview On Oct. 26, 2014, the European Central Bank published the results of its comprehensive review of Europe's largest banks, including the European Banking Authority's (EBA) EU-wide stress test. The information contained in the ECB's results is consistent with that already incorporated into our assessments of Veneto Banca's moderate capital and earnings and weak risk position. We also see no significant impact of the announcements on other factors of Veneto Banca's business and financial profiles. We are therefore affirming our 'BB/B' long- and short-term counterparty credit ratings on Veneto Banca. The negative outlook reflects the possibility that we could lower the ratings if we lower the sovereign credit rating on Italy, if the economic conditions in which Italian banks operate deteriorate further, and if this, combined with weaker-than-expected capital generation, negatively affected our view of Veneto Banca's capital position. Rating Action On Oct. 30, 2014, Standard & Poor's Ratings Services affirmed its 'BB/B' longand short-term counterparty credit ratings on Italy-based Veneto Banca. The outlook remains negative. Rationale The affirmation follows the Oct. 26, 2014, release of the results of the European Central Bank's (ECB's) comprehensive review of Europe's largest banks, including the European Banking Authority's (EBA) EU-wide stress test. The affirmation reflects that the information disclosed as part of this exercise is consistent with that already incorporated in our assessment of Veneto Banca's moderate capital and earnings and weak risk position. We also see no significant impact of the announcements on other factors of Veneto Banca's business or financial profile. The outcome of the comprehensive assessment revealed that Veneto Banca would record a potential capital shortfall of 574 million and 714 million under the baseline and the adverse scenarios, respectively, of the EBA's stress OCTOBER 30,

3 test, which was based on Veneto Banca's balance sheet at the end of However, when taking into account the capital-enhancing measures already implemented in 2014, namely the 474 million capital increase and the conversion of 350 million bonds into common equity, Veneto Banca would be able to meet the required capital thresholds. By these measures, Veneto Banca therefore has confirmed it does not need to take any additional measures to pass the exercise. The ECB's asset quality review (AQR) revealed an increase in Veneto's nonperforming assets (NPAs) ratio of about 3% (or 940 million) to 21.5% of customer loans as of end The AQR also showed about 570 million of additional provisioning needs as of year-end 2013, which would have brought its coverage of NPAs to about 44.5%. Our analysis of Veneto Banca's solvency position (including our moderate assessment of its capital and earnings and weak assessment of its risk position) already factor in our views that: Veneto's higher-than-average stock of NPAs was likely to continue to increase to over 20% of gross customer loans by 2016; Veneto Banca's 33% coverage of NPAS through provisions as of end-2013 was only modest, which would likely lead to a significant level of loan-loss provisions over the next two years; and The capital-enhancing measures undertaken by Veneto Banca to date in 2014 have mitigated the impact of these factors on Veneto Banca's solvency. In this context, our forecast for Veneto's risk-adjusted capital ratio (RAC) before diversification adjustments for end-2016 already incorporates sizable additional credit losses (about 1.8 billion over the period ), which would negatively affect Veneto Banca's organic capital generation over the next months. This amount is above that incorporated in the baseline scenario of the stress test after taking into account the AQR findings, and it is close to the adverse scenario. Were we to incorporate the AQR provisions shortfall as of end-2013 into our RAC ratio as of that date, rather than as expected provisioning over the next two years as we have in our forecasts, the 2013 RAC ratio would have remained above 5%, pro forma the capital-enhancing measures completed in This level is consistent with our moderate assessment of Veneto Banca's capital and earnings position because our RAC forecast is in the range of 5.7%-6.2% by end-2015, after taking into account Veneto Banca's 2014 capital enhancing measures. We already incorporate in our assessment the conversion of a 350 million convertible bond into equity, completed on June 30, 2014, and the capital increase of about 474 million completed on Aug. 4, We estimate that the combined effect of these measures would benefit Veneto Banca's Common Equity Tier 1 (CET1) ratio as of end-2013 by about 330 basis points (bps) and our pro forma 2013 RAC ratio before diversification by about 200 bps. In addition, Veneto Banca has also announced that it has reached a formal agreement to sell a large portion of its stake in Banca Intermobiliare. We acknowledge that this process could take some time because it is still pending regulatory approvals, and we do not yet incorporate the benefit of this potential sale in our OCTOBER 30,

4 assessment of Veneto Banca's capital position. We nevertheless understand that, once completed, the sale would improve Veneto Banca's CET1 ratio by about 90 bps. We also see no significant impact of the announcements on other factors of Veneto Banca's business or financial profile, namely its funding and liquidity profiles. This is because we do not expect any implications of the findings of the EBA and ECB exercises on Veneto Banca's loyal customer base and strong franchise in its stronghold of the wealthy Veneto region that might weaken Veneto Banca's business stability and retail-funded base. Outlook The negative outlook reflects the possibility that we could lower our ratings on Veneto Banca if any of the following conditions were to occur: We lower the sovereign credit rating on Italy; The economic conditions in which Italian banks operate deteriorate further, and this, combined with weaker-than-expected capital generation were to negatively affect our view of Veneto Banca's capital position; Veneto Banca were ultimately unable to complete its plan to reduce its exposure to funding from the ECB and correct its funding imbalances. Under this scenario, we would be unlikely to consider that Veneto Banca would be able to achieve an "adequate" liquidity position according to our criteria by the time the ECB's long-term refinancing operation (LTRO) expires; or If we were to envisage any evidence of unexpected corporate governance issues, particularly if regulatory authorities were to request that Veneto Banca take additional significant restructuring actions. We do not currently expect to revise the outlook on Veneto Banca to stable. However, we could do so if Veneto Banca were to successfully deliver its business and financial plans, and if we were to believe that downside risks to the economic operating environment in Italy--and subsequently to our assessment of Veneto Banca's capital--were easing. In addition, we could lower our ratings on Veneto Banca by one notch by year-end 2015 if we were to consider that extraordinary government support is less predictable under the EU's new legislative framework. We could remove the notch of uplift for potential extraordinary support, which we currently incorporate into the ratings, shortly before the January 2016 introduction of bail-in powers under the EU's Bank Resolution and Recovery Directive (BRRD) for senior unsecured liabilities. In addition to potential changes in Veneto Banca's stand-alone credit profile (SACP) and government support, we will review other relevant rating factors when taking any rating actions. These might include any measures that Veneto Banca might take that provide substantial additional flexibility to absorb losses while a going-concern and mitigate bail-in risks to senior unsecured creditors. OCTOBER 30,

5 Ratings Score Snapshot Issuer Credit Rating BB/Negative/B SACP b+ Anchor bbb- Business Position Adequate (0) Capital And Earnings Moderate (-1) Risk Position Weak (-2) Funding and Average and (-1) Liquidity Moderate Support (+2) GRE Support (0) Group Support (0) Sovereign Support (+2) Additional Factors (0) Related Criteria And Research Related Criteria Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Sept. 18, 2014 Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013 Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Ratings List Ratings Affirmed Veneto Banca SCPA Counterparty Credit Rating Senior Unsecured Subordinated Preferred Stock BB/Negative/B BB CCC+ CCC Additional Contact: Financial Institutions Ratings Europe; OCTOBER 30,

6 Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) OCTOBER 30,

7 Copyright 2014 by Standard & Poor's Financial Services LLC (S&P), a part of McGraw Hill Financial, Inc. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&Ps opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at OCTOBER 30,