Analyst: Alberto Buffa di Perrero, Milan (39) ; Bernard de Longevialle, Milan (39)

Transcription

1 Publication Date: 30-May-2003 Reprinted from RatingsDirect Mediobanca SpA Analyst: Alberto Buffa di Perrero, Milan (39) ; Bernard de Longevialle, Milan (39) CREDIT RATING Outstanding Rating(s) Counterparty Credit Certificate of deposit Senior unsecured Local currency Credit Rating History Apr. 9, 2002 Sovereign Rating Italy (Republic of) AA-/Negative/A-1+ AA-/Negative/A-1+ AA-/A-1+ AA- AA-/A-1+. AA/Negative/A-1+ Related Entities Mediobanca International Ltd. Rationale The ratings on Mediobanca are supported by the bank's sound financial profile. They also reflect the expectation of a reduction in the bank's risk appetite and stabilization in its business position in Italy, following the recent appointment of a new management team and a new equilibrium found among its largest shareholders. Mediobanca has continued to post stable operating profitability, despite the challenging operating environment facing investment banking, thanks to its good deal flow and to some diversification into retail financial services. Core profitability remains relatively modest. Revenues are well balanced between interest and noninterest components, and the bank maintains strict control over expenses. Financial flexibility has been weakened as a result of a reduction in unrealized gains on Mediobanca's equity portfolio, which shrank to 2.7 billion as of May 2003 from 4.5 billion one year earlier. These gains are concentrated in the bank's 13.9% stake in the Italian insurer Assicurazioni Generali SpA. As the book value of this investment is still significantly below its market value, these latent gains remain well sheltered against depreciation. Mediobanca has superior capital strength, with 4.7 billion in adjusted common equity and a regulatory Tier 1 ratio of 16.9% at Dec. 31, However, the bank's capital position should be evaluated in light of the underwriting and market risks arising from its investment banking activities, which are not fully reflected in regulatory ratios. Asset quality remains superior, with annualized new loan-loss provisions at a low 0.3% of net loans. All credit losses come from parabanking subsidiaries, and historically have been extremely low, thanks to the bank's Page 1 of 10

2 strong risk controls, in-depth knowledge of the Italian corporate sector, and long-term client relationships. Mediobanca's business with large corporates results, however, in significant single-name concentration risk in the loan portfolio. Concerns are partly mitigated by the bank's track record in managing credit risk. As a result of its diversified and well-matched funding structure, Mediobanca's liquidity risk is low, despite its lack of a retail deposit base. Trading risk at the bank is also contained. Outlook The negative outlook reflects the possibility that the ratings could be lowered should the bank undertake individual transactions or strategic moves that jeopardize its current risk profile. The bank's absence of geographic diversification outside Italy makes maintaining its current domestic franchise vital. A weakening of Mediobanca's domestic franchise would therefore be a negative rating factor. The 'AA-' rating reflects the expectation that Mediobanca will maintain its current asset quality, capitalization, and efficiency levels. Profile Mediobanca's business profile includes wholesale banking (investment banking and corporate lending), retail financial services, and a range of equity participations that places Mediobanca at the center of the country's economy. The bank's franchise is limited to a domestic presence. This is a disadvantage when competing with global investment banks, and makes Mediobanca dependent on local trends in M&A. Wholesale banking is represented by advisory, M&A, capital markets and corporate finance activity, and by lending to corporates, mainly Italian. In the latter field, Mediobanca has a leading position in Italy, mainly in the syndicated loan market, M&A, and equity issuance. Retail financial services are increasingly important, contributing to one-half of net interest margins and onethird of revenues as of the end of Mediobanca is active in mortgage lending, leasing and consumercredit businesses, through specific product companies. The bank holds stakes in several key players in the Italian economy, which cement historical alliances with its closest partners. Holdings classified as strategic are held as medium- to long-term investments, while the rest are held for a shorter period and are more actively managed in order to realize capital gains. About 24% of the 2.9 billion book value of the equity portfolio at year-end 2002 (or 10% of total assets in the last five years) was accounted for by Mediobanca's stake in its historical ally, Assicurazioni Generali. As of May 2002, almost all of the bank's latent gains were concentrated in this stake. This holding represents 13.9% of Generali's share capital; Generali, in turn, owns more than 3% of the bank, 1.99% of which is tied to a shareholding pact with Mediobanca. Other major stakes held by Mediobanca at year-end 2002 included Ferrari ( 490 million book value, or 21.5% stake), Ciments Français ( 224 million, 11.5%), Olivetti ( 206 million, 2.3%), RCS Media Group ( 155 million, 10.3%), Banca Intesa ( 106 million, 0.9%), and Fiat ( 102 million, 3.05%). The Ferrari stake, purchased in mid-2002, has to be lowered below 15%, to respect the Bank of Italy's rules on separation between banks and corporates. Following the merger between financial institutions Fondiaria and SAI at year-end 2002, which gave rise to concentration concerns, Mediobanca lowered its stake to less than 2% from 10.96% in Fondiaria-SAI SpA, together with bringing down to zero its direct banking exposure to Premafin, the Fondiaria-SAI holding. While Mediobanca maintains a leading position in its domestic market, as witnessed by its continuing presence in the most important investment-banking deals in Italy, the bank will likely face growing competitive pressures, as the Italian market has been relentlessly opening up under the forces of privatization and deregulation, and global investment banks and domestic retail players have progressively strengthened their wholesale banking operations. Page 2 of 10

3 Ownership and Legal Status Mediobanca is a joint stock company listed on the Milan Stock Exchange. The newly approved shareholding pact binds 56.8% of Mediobanca capital. Shareholders in the pact are divided between "Group A", "Group B", and "Group C". Group A is reserved for banks, while Group B is for domestic investors, and Group C is for foreign investors. Among the Italian investors are Capitalia and UniCredito Italiano (9.49% and 8.75% respectively); Mediolanum (1.8%); Commerzbank (1.6%); Gruppo Italmobiliare (2.6%); Fiat SpA (1.8%); Gruppo Fondiaria-SAI SpA (3.8%); Assicurazioni Generali (1.9%); and Pirelli (1.8%). Foreign investors (Group C) hold 10% of the bank's capital, and include the French businessman Vincent Bolloré, Groupama, Santander, and other holders of smaller stakes. In the near future, Capitalia and UniCredito are expected to reduce their holdings to about 6%. Strategy New management faces the strategic challenge of consolidating Mediobanca's domestic franchise, while reducing the bank's investment-banking risk appetite. Mediobanca is expected to maintain a conservative approach in implementing its strategic expansion plan, including developing new business; it is expected to consolidate its domestic franchise towards SMEs, and to progressively strengthen its presence in the wealth management arena. Mediobanca's strategy has always been that of seeking medium-term results rather than focusing on shortterm performance. This is evident when analyzing the bank's larger-than-life relationship with its key customers, together with its cautious balance-sheet policy, characterized by the application of strict accountancy principles and by the maximization of provisioning. While in the past Mediobanca has been willing to take on sizeable financial risks in individual transactions, such as when it acquired a minority stake in Ferrari, Standard & Poor's expects the bank to have a more conservative approach to risks undertaken in its investment banking operations following recent changes in management. The bank's business profile is expected to further diversify towards midsize corporates and the retail financial services segment. Wholesale banking (corporate and investment banking), private banking, and private equity will be the three business areas where Mediobanca is expected to concentrate its future development. In order to consolidate its position in Italian investment banking, Mediobanca plans to open local offices in the main European capitals, to assist its customers in cross-border transactions. The bank's implementation of this plan will depend on expected profitability, however. In the private-banking business, after the creation of Banca Esperia in 2001 in partnership with Mediolanum, an Italian wealth manager, Mediobanca agreed in May 2002 to increase its share in its historical partner, Compagnie Monegasque de Banque, to 51%. Completion of this deal will bring to 8 billion the total amount of private-banking assets managed by Mediobanca, up from 2 billion managed by Banca Esperia, without adding significant risk to the group's financial profile. The stake increase could be completed as early as the end of Standard & Poor's understands that Mediobanca intends to pursue development of the private-equity business gradually and in partnership with an experienced major player. Given the higher risk involved, Standard & Poor's will monitor the bank's progress in this sector. Asset Quality Mediobanca's asset quality is characterized by high single-name concentration and low level of credit losses, reflecting superior management of credit risk. The risks related to single-name concentration in the loan book are somewhat mitigated by the bank's thorough knowledge of counterparts and large equity base. Page 3 of 10

4 Credit losses are expected to increase in the next few years, as the bank intends to target the midsize enterprise sector, and to move towards more structured forms of lending. Nevertheless, Standard & Poor's views this risk as limited, as it expects Mediobanca to apply its customary caution in developing new lending activities. Additional comfort derives from the fact that lending volumes are not expected to increase significantly in the coming years. The corporate loan portfolio is limited to about 130 industrial groups, and is, with some exceptions, domestic. Mediobanca predominantly works with large Italian corporate names; concentration by client is therefore intrinsic to its lending activity, as evinced by the 10 largest loans representing more than half of the consolidated loan book and more than twice the bank's equity base. This risk is reduced by the bank's indepth knowledge of the Italian corporate sector and a long-term relationship with counterparties that is cemented by direct equity stakes. The bank has a policy of prudent selection of potential clients and sectors and a system of constant monitoring of clients. Being active in the investment-banking market means that Mediobanca is exposed to taking one-off big-ticket credit risks that are subsequently syndicated to other investors. The risk that temporarily lies on Mediobanca books is sometimes considerable, but so far the bank has demonstrated excellent credit-risk selection and syndication capabilities. Mediobanca's success in the selection of its credit counterparts is reflected in its impressive track record in asset quality, with a record of credit losses of close to zero in its 50 years of existence. Nonperforming loans, which have never exceeded 1% of loans in gross terms, are generated from retail financial services activity, which is under strict control. Profitability Mediobanca's capacity for revenue generation is contained, but this is counterbalanced by a small cost base and low cost of credit risk. Investment of the bank's large capital base is key in providing a good floor for the interest-margin level, which helps the bank to cover its lean cost structure. This mitigates the bank's reliance on more volatile sources of income, such as investment-banking-related commissions. Standard & Poor's expects Mediobanca to maintain resilient core profitability in the next two years. As the bank is expected to continue to maintain a grip on costs and work to maximize unitary spreads on loans, the volatility in fees from investment banking is not expected to structurally undermine the bank's incomegeneration capacity. The bank is also expected to progressively enjoy revenues from a greater focus on retail wealth-management products and services. The cost of credit risk is expected to remain contained. Mediobanca has shown stable capacity for revenue generation over the years. Interest income represents more than one-half of revenues. As of year-end 2002, net interest income grew 14.5% from a year earlier. Retail-credit activity (including family-run, small corporates) represented a one-third of the group's total loan portfolio, and generated 47% of group net interest income and 29% of total group revenues. The bank's lending towards large corporates shows a lower unitary contribution than the classical retail-credit activity, as loans are generally big-ticket. Nevertheless, the cost of funding benefits from Mediobanca's large, free capital base. Fees and commissions generated from investment-banking activity represent the most volatile component of revenues, as is clear from the boom that was followed by difficult market conditions. This type of income, however, represented less than 30% of revenues (excluded trading gains and losses) at the peak of Commissions from wholesale banking have continued to be sizeable during 2003, thanks to the conclusion of a few large deals. Dividends related to the vast equity portfolio represent another important--albeit volatile--source of income for Mediobanca. Dividends have ranged between 20% and 25% of revenues in the last five years. Mediobanca maintains tight cost control, which derives not only from the fact that medium-term lending, investment banking, and management of its equity stakes require relatively few staff, but also from meticulous attention to expenses. The cost-to-income ratio was 48% as of the end of 2002, in line with a year earlier, excluding dividend cashing. Although this ratio tends to fluctuate as it is revenue-driven, overhead expenses accounted for less than 1% of assets- a stable ratio--over the last five years. Bottom-line profitability is also strengthened by a low cost of credit risk, which does not prevent Mediobanca from maximizing fiscally deductible general credit provisioning. Page 4 of 10

5 The bank posted a net loss of 206 million at March 2003 and the net consolidated results continue to be hurt by the marking to market of its equity portfolio, which has generated significant write-offs (see Asset Liability section). Although the significant unrealized capital gains in some stakes held by Mediobanca largely offset the declines in the market values of other stakes, the bank's policy has been to write down losses in market value immediately, while not recognizing any unrealized capital gains. This policy is partially driven by a relative lack of market pressure to report increasing profits and the tax deductibility of write-downs on financial investments. Asset-Liability Management Mediobanca cautiously manages its exposure to liquidity risk, thanks to its placing power of bonds to retail customers. Trading activity is conservatively run. Most market risk stems from the bank's large equity portfolio. At year-end 2002, about two-thirds of Mediobanca's funding needs were met through medium-term bonds and CDs that were mainly placed with retail customers through the branch networks of the main banking group correspondents, or through the Post Office. The bank placed a total 1.4 billion of bonds in The remaining funding consists of bank loan agreements with the major national and international banks (15% of total funding), together with credit lines granted by the European Investment Bank (3%), and by customers' current accounts (7%). Mediobanca is a net borrower on the interbank market. In the coming years, with the reference banks more and more engaged in placing their own bonds, an increasing amount of Mediobanca's funding needs is expected to be met in the eurobond market. Currently, 500 million of senior notes has been drawn down under a 5 billion EMTN program. Mediobanca's 4.5 billion securities trading portfolio has a low-risk profile. Some 40% of the portfolio is represented by domestic government bonds; the rest consists of bonds issued by investment-grade corporates that are historical clients of Mediobanca. Additionally, own bonds represented 6% of the total trading portfolio. The proprietary equity-trading portfolio is negligible. Mediobanca's accounting rules are conservative, since trading securities are valued at the lower of cost and market price; the 87.5 million loss on forex and derivatives transactions (for hedging purposes only) was offset by 60 million in unrealized gains on these instruments, and by an additional 77 million in latent gains on treasury securities. Such gains are cashed only when realized. Market risk in the equity portfolio is represented by fluctuations in the market value of holdings, which are booked at the lower of cost and market value. At year-end 2002, write-offs amounted for 271 million against 99 million in net operating income. Market value is calculated by taking the value at the date of the balancesheet closing. Gains are kept as latent, such as the 2.7 billion on the Generali stake. This is considered to be a conservative accounting approach. Although Mediobanca's interest rate exposure is structurally affected by the relevant size of free capital, the risk profile is low through recourse to hedging. At year-end 2002, market Value at Risk on a 95% certainty, one-day holding period on banking and trading books was 1.4 million. Capital Mediobanca's capitalization represents a key strength in the assessment of the bank's risk profile. Unrealized capital gains, albeit reduced to those on the Generali stake, enhance financial flexibility. Maintaining the current capital level is key in light of the big-ticket risks related to the bank's investment-banking activity and high single-name concentration in the loan book, which are not captured by capital ratios. With Mediobanca having a ratio of adjusted common equity to risk-weighted assets of 16.9% at year-end 2002, the bank's capital base compares well with those of national and international peers. This figure is commensurate with the risks that may arise from the bank's investment banking activities. Quality of capital is considered to be excellent, as the bank has not resorted to hybrid instruments. Page 5 of 10

6 The unrealized capital gains on its equity portfolio ( 2.7 billion at mid-may 2003) are wholly concentrated in the sizable stake Mediobanca owns in Generali. As the book value of this stake is particularly low, Mediobanca is strongly protected against fluctuations in the Generali stock price. Table 1 Mediobanca SpA Balance Sheet Statistics --Year ended June 30-- Breakdown as a % of assets (adj.) (Mil. ) Assets Cash and money market instruments 6,553 3,996 4,233 2,689 3, Securities 2,888 4,213 2,498 1,853 2, Nontrading securities 2,888 4,213 2,498 1,853 2, Customer loans (gross) 16,676 17,182 16,779 17,149 14, Public sector/government Total real estate loans All other loans 15,359 15,961 15,654 16,188 13, Loan-loss reserves Customer loans (net) 16,571 17,084 16,672 17,032 14, Earning assets 26,042 25,300 23,451 21,627 20, Equity interests/participations (nonfinancial) 3,282 3,267 3,301 3,056 2, Intangibles (nonservicing) Fixed assets Accrued receivables 1,185 1,113 1, All other assets Total reported assets 31,377 30,505 28,411 26,196 24, Less nonservicing intangibles (3) (3) (3) (3) (2) Adjusted assets 31,374 30,502 28,409 26,193 24, Liabilities Breakdown as a % of liabilities + equity Total deposits 7,666 6,894 6,697 5,442 4, Noncore deposits 6,297 6,312 5,913 4,239 4, Core/customer deposits 1, , Repurchase agreements N.A. 1,396 1, ,452 N.A Other borrowings 16,256 14,258 13,184 13,126 12, Other credit reserves Other liabilities 2,728 3,044 2,377 3,049 1, Total liabilities 26,664 25,605 23,886 22,282 20, Total shareholders' equity 4,714 4,900 4,526 3,915 3, Minority interest-equity Common shareholders' equity (reported) 4,657 4,846 4,476 3,885 3, Share capital and surplus 2,196 2,196 2,137 1,755 1, Revaluation reserve General banking risk reserves Reserves (incl. inflation revaluations) 2,316 2,181 1,810 1,603 1, Retained profits (186) (0.59) Total liabilities and equity 31,377 30,505 28,411 26,196 24, Less revaluation reserve, intangibles (16) (17) (16) (13) (12) Tangible total equity 4,697 4,883 4,509 3,902 3,596 Tangible common equity 4,697 4,883 4,509 3,902 3,596 Adjusted common equity 4,697 4,883 4,509 3,902 3,596 Adjusted total equity 4,697 4,883 4,509 3,902 3,596 *Half-year data as of Dec. 31, Ratios annualized where appropriate. N.A.-Not available. Page 6 of 10

7 Table 2 Mediobanca SpA Profit and Loss Statement Statistics --Year ended June 30-- Adj. avg. assets (%) (Mil. ) Profitability Interest income 697 1,264 1,295 1,055 1, Interest expense Net interest income Operating noninterest income Fees and commissions Equity in earnings of unconsolidated subsidiaries (2) (5) (0.02) (0.02) Trading gains (84) (152) 21 (27) 48 (0.54) (0.51) 0.08 (0.11) 0.20 Other noninterest income Operating revenues Noninterest expenses Personnel expenses Other general and administrative expense Depreciation and amortization - other Net operating income before loss provisions Credit loss provisions (net new) Net operating income after loss provisions Nonrecurring/special income Nonrecurring/special expense Pretax profit (182) (1.18) Tax expense/credit 0 (34) (0.11) Net income before minority interest (182) (1.18) Minority interest in consolidated subsidiaries Net income before extraordinaries (186) (1.20) Net income after extraordinaries (186) (1.20) Core earnings Asset Quality Nonperforming assets Nonaccrual loans Classified loans (substandard, doubtful, loss) Average balance sheet Average customer loans 16,827 16,878 16,852 15,681 14,073 Average earning assets 25,671 24,375 22,539 20,968 20,382 Average assets 30,941 29,458 27,304 25,257 24,007 Average total deposits 7,280 6,795 4,820 4,212 4,341 Average interest-bearing liabilities 23,235 22,022 19,224 18,646 18,625 Average common equity 4,752 4,661 4,205 3,749 3,522 Average adjusted assets 30,938 29,455 27,301 25,255 24,005 Other data Off-balance-sheet credit equivalents 15,166 10,126 10,774 10,695 10,079 *Half-year data as of Dec. 31, Ratios annualized where appropriate. Page 7 of 10

8 Table 3 Mediobanca SpA Ratio Analysis --Year ended June 30-- ANNUAL GROWTH (%) Customer loans (gross) (5.89) 2.40 (2.16) Loss reserves (6.87) (8.32) Adjusted assets Customer deposits (25.70) (34.82) Tangible common equity (7.62) Total equity (7.60) Operating revenues (20.38) (10.48) 9.66 (3.81) Noninterest expense (3.11) Net operating income before provisions (33.22) (20.48) (8.21) Loan-loss provisions (6.79) Net operating income after provisions (39.61) (23.48) (9.25) Pretax profit (259.49) (46.81) (0.39) (14.63) Net income (239.09) (13.65) PROFITABILITY (%) Interest Margin Analysis Net interest income (taxable equiv.)/avg. earning assets Net interest spread Interest income (taxable equiv.)/avg. earning assets Interest expense/avg. interest-bearing liabilities Revenue Analysis Net interest income/revenues Fee income/revenues Market-sensitive income/revenues (34.76) (24.92) 3.08 (4.28) 7.39 Noninterest income/revenues Personnel expense/revenues Noninterest expense/revenues Noninterest expense/revenues less investment gains Expense less amortization of intangibles/revenues Expense less all amortizations/revenues Net operating income before provision/revenues Net operating income after provisions/revenues New loan-loss provisions/revenues Net nonrecurring/abnormal income/revenues (116.25) (16.46) (16.03) Pretax profit/revenues (75.26) Net income/revenues (75.26) Tax/pretax profit 0.00 (14.67) Other Returns Pretax profit/avg. risk assets (%) (1.35) Net income/avg. risk assets (%) (1.35) Revenues/avg. risk assets (%) Net operating income before loss provisions/avg. risk assets (%) Net operating income after loss provisions/avg. risk assets (%) Net income before minority interest/avg. adjusted assets (1.18) Net income/avg. assets + securitized assets (1.15) Net income/employee ( ) (274,077) 212, , , ,108 Personnel expense/employee ( ) 83,913 88,614 79,687 77,593 71,748 Cash earnings/avg. tang. common equity (ROE) (%) (7.36) Core earnings/avg. tang. common equity (ROE) (%) Page 8 of 10

9 FUNDING AND LIQUIDITY (%) Customer deposits/funding base Total loans/customer deposits Total loans/customer deposits + long-term funds Customer loans (net)/assets (adj.) CAPITALIZATION (%) Adjusted common equity/adjusted assets Adjusted common equity/adjusted assets + securitization Adjusted common equity/risk assets Adjusted common equity/customer loans (net) Internal capital generation/prior year's equity (7.68) Tier 1 capital ratio Regulatory total capital ratio Adjusted total equity/adjusted assets Adjusted total equity/adjusted assets + securitizations Adjusted total equity/risk assets Adjusted total equity plus LLR (specific)/customer loans (gross) Common dividend payout ratio ASSET QUALITY (%) New loan loss provisions/avg. customer loans (net) Loan-loss reserves/customer loans (gross) Credit-loss reserves/risk assets Nonperforming assets (NPA)/customer loans + ORE NPA (excl. delinquencies)/customer loans + ORE Net NPA/customer loans (net) + ORE NPA (net specifics)/customer loans (net specifics) Classified loans/customer loans Loan-loss reserves/npa (gross) *Half-year data as of Dec. 31, Ratios annualized where appropriate. Analyst Addresses Alberto_Buffadiperrero@standardandpoors.com bernard_delongevialle@standardandpoors.com FIG_Europe@standardandpoors.com Page 9 of 10

10 This report was reproduced from Standard & Poor s RatingsDirect, the premier source of real-time, Web-based credit ratings and research from an organization that has been a leader in objective credit analysis for more than 140 years. To preview this dynamic on-line product, visit our RatingDirect Web site at Standard & Poor s. Published by Standard & Poor s, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY Editorial offices: 55 Water Street, New York, NY Subscriber services: (1) Copyright 2000 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poor s from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor s or others, Standard & Poor s does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Page 10 of 10