Credit Opinion Credito Valtellinese

Transcription

1 Credit Research 5-Oct-04 10:52 Analysts: Alejandra Diez, Rocco Fanciullo, Giorgio Frascella, Federica Viola Head of Research and Strategy: Marco Annunziata Credit Opinion Credito Valtellinese Mentioned Companies Credito Valtellinese Moody s Baa1 / Stable S&P NR Fitch IBCA NR Credito Valtellinese (CREVAL) is a regional co-operative bank placed in Valtellina, a wealthy area in Northern Lombardy. Born as a co-operative bank firmly rooted in the local territory, CREVAL has recently been transformed into a territorially diverisifed group with a broad product portfolio in asset management and bancassurance. Notwithstanding a slight improvement in comparison to the previous year, 1H04 results reveal the group s persisting weak level of efficiency, with a cost/income ratio of 78% and a ROE at 2.82%. The group s overheads steadily increased in the last years as a result of the aggressive expansion strategy undergone in the recent past, and a significant improvement in efficiency is the necessary condition for the group to reach a satisfactory level of profitability. CREVAL credit quality is weak with a high percentage of gross doubtful loans on total gross loans (9.21%). The expansion in Sicily, a region in Southern Italy were credit quality is traditionally worse than in Northern areas, determined an increase in the group s doubtful loans as a percentage of total assets. Yet, this ratio has steadily improved from 1H03, and closed at 7.06% from last year s 7.78%. The recent expansion campaign undergone by the group negatively weighted on the group s capital ratios also. Total capital (8.03%) and Tier 1 (6.03%) were slightly lower compared to the average of its regional peers according to 1H04 figures. Table of contents page 2 Group s structure and operating activity page 2 Efficiency page 3 Credit quality page 4 Capitalisation page 4 Distribution of maturities page 5 Peer page 6 - Conclusions Credit Analyst Federica Viola Rocco Fanciullo Credito Valtellinese is rated Baa1 by Moody s, and we believe a substantial improvement in the group s efficiency and profitability, together with an improvement in its credit quality, would represent essential requirements for the group to merit a higher rating class.

2 Group s structure and operating activity Credito Valtellinese (CREVAL) is a co-operative bank placed in Valtellina, a wealthy area in Northern Lombardy where the bank enjoys a market share above 40%. As a co-operative bank, CREVAL shareholder members have one vote regardless of the capital held and their stakes cannot exceed 0.50% of the banks capital. Born as a co-operative bank firmly rooted in the local territory, CREVAL has recently been transformed into a territorially diversified group with a broad product portfolio in asset management and bancassurance. In particular, the group developed its asset management product portfolios in partnership with the Swiss group, Julius Baer. CREVAL also recently created a new bancassurance company named Global Assicurazioni, and a Joint Venture with Colombo Gestioni Patrimoniali in asset management. The group s structure recently changed as a result of an aggressive expansion strategy mainly focused on Lombardy and Sicily, and marginally on Tuscany and Lazio 1, undergone in response to increased competitive pressures. In particular, CREVAL expanded its activities in the southern region of Sicily, where it purchased Banca Popolare di Santa Venera, Cassa San Giacomo, Banca Regionale Sant Angelo and Leasingroup Sicilia between 1999 and Sicilian activities were afterwards (2002) merged into Credito Siciliano. The group is currently organized into 4 territorial banks (the parent company Credito Valtellinese, Credito Artigiano, Credito Siciliano and Banca dell Artigianato e dell Industria), three specialized companies (Bancaperta, Cassa San Giacomo, Rileno) and three production companies offering services to the group itself (Deltas, Bankadati servizi informatici and Stelline Servizi Immobiliari). Efficiency Notwithstanding a slight improvement in comparison to previous year, 1H04 results reveal the group s persisting weak level of efficiency, with a cost/income ratio of 78% and a ROE at 2.82%. The group s overheads steadily increased in the last years as a result of the aggressive expansion strategy undergone in the recent past, and a significant improvement in efficiency is the necessary condition for the group to reach a satisfactory level of profitability. 1 In its expansion strategy, the group has followed the federal model, where the individual local banks retained their brands while some functions were centralised (IT, Treasury, cross-selling of asset management) to realise economies of scale. 2

3 Table 1: Efficiency Profitability/Efficiency Net Interest Margin 237, , , , ,646 Revenues from services and financial operations 146, ,762 94, , ,981 Gross operating revenues 383, , , , ,627 Overheads 296, , , , ,335 Net interest margin / Earning assets Gross operating revenues / Earning assets Cost/Income ROA ROE Source: UBM from company data Credit quality CREVAL credit quality is weak with a high percentage of gross doubtful loans on total gross loans (9.21%). According to 1H04 figures, 82% of gross doubtful loans are represented by NPL. The expansion in Sicily, a region in Southern Italy where credit quality is traditionally lower than in Northern areas, determined an increase in the group s doubtful loans as a percentage of total assets. Yet, this ratio has steadily improved from 1H03, and closed at 7.06% from last year s 7.78%. CREVAL reacted to its increased risk profile with a stronger provisioning policy, and as a result coverages improved in the last years: in particular coverage over doubtful loans passed from 48% to 51% and NPL coverage improved to 60% from 57% between 1H03 and 1H04. The group s loan portfolio is mainly devoted to SME s active in services and constructions, and there is no concentration risk in any particular sector. Moreover, as of June 2004 CREVAL has just one big risk, exactly as in December In order to improve the group s credit quality, credit policy has been centralized in Cassa San Giacomo, which now is in charge of managing all the group s non-performing loans and assessing and monitoring large and medium exposures. In order to comply with Basel II requirements, CREVAL is developing its internal rating model (foundation approach 2 ) to assess credit risk, and the standard approach for operational risk. 2 In the Foundation approach only the Probability of Default is estimated internally by the bank. Other parameter like Loss Given default, Exposure at Default and effective maturity are determined by the Bank of Italy. 3

4 Table 2: Credit quality Creditq quality Doubtful loans/total assets Gross doubtful loans / Gross loans Net doubtful loans/ Net loans Gross NPL / Net loans Net NPL / Net loans Coverage (Doubtful loans) Coverage (NPL) LLP ( 000) 22,682 24,482 14,248 35,111 19,183 Source: UBM from company data Capitalisation The recent expansion campaign undergone by the group negatively weighted on its capital ratios, which are slightly lower compared to the average of its regional peers. During the first half of 2004, capitalization ratios improved as CREVAL successfully operated an equity capital increase through the issuance of more than 7mn new shares. A further boost came from the conversion of the last tranche of the convertible bond (2% ). The net positive effect of both operations on the shareholders equity was 88mn and brought the Tier 1 ratio to 6.03% from 5.8% at the end of last year. In April 2004 the group issued a new convertible bond ( 293mn), whose conversion period starts from April At the current equity price the likelihood of the conversion is quite high. The eventual conversion therefore should give a further positive contribution to the capital ratios in The bank has also announced its intention to acquire the remaining shares (40.45%) in the subsidiary Banca dell Artigianato e dell Industria S.p.A. di Brescia and the full outstanding of the subordinated bond issued by the same subsidiary. The operation, which will be carried out in 2005, will require a cash outflow not higher than 21.2mn and hence should determine a negligible negative effect over capital ratios. Table 3: Capital ratios Patrimonail ratios Shareholders' equity / Total assets Total capital ratio Tier 1 ratio Source: UBM from company data Distribution of maturities In line with the outlook of upcoming change in the direction of monetary policy in Europe, Creval changed the balance of fixed rate assets and liabilities to negative from positive. Hence, at the 4

5 moment, the group is well positioned to benefit from the rate increase in Eurozone due to occur in The group is currently issuing a senior bond on the primary market, to refinance the substantial bond redemption coming due in the next 12 months (almost 43% of the group s outstanding bonds will mature by June 2005). Figure 1- Fixed rate assets & liabilities (LHS) Bond maturity distribution (RHS) Assets Liabilities 1,400 1,200 1,000 mn mn FY-02 H1-03 FY-03 H under 1 yr between 1 & 5 yr over 5 yr Source: UBM from company data, Bloomberg Peer analysis Among the two selected peers Banca Popolare di Sondrio and Banca Popolare di Vicenza, both cooperative banks with a similar dimension, the former is the best competitor to consider as it also operates in CREVAL s original territory, Valtellina. CREVAL generally evidences a weaker credit profile than higher rated peer Popolare di Sondrio, both in terms of efficiency (cost/income 78.6% vs Sondrio s 63.5%) and profitability (roe at 2.69% vs Sondrio s 7.42%). The groups weaker level of credit quality in comparison to both peers is also evident, with a high level of doubtful loans/total gross loans (10.11%) and doubtful loans/total assets (7.75%). Moreover, the aggressive investment policy undergone in the past years negatively impacted on CREVAL s capital ratios, which are thin (especially Tier 1 ratio, even after the capital increase) and lower than both peers. 5

6 Table 4: Peer analysis ( 000, FY2003) Credito Banca popolare di Banca popolare di V a ltellin e se Sondrio Vicenza S&P A- / Neg ative Moody's B aa1 / S tab le Fitch A - / S tab le A - / S tab le N et Interest m argin 253, , ,405 Gross operating incom e Overheads 453, , , , , ,345 Cost / Incom e 78.6% 63.5% 80.4% ROE Gross doubtful loans/total gross loans 2.69% 7.42% 3.23% 10.11% 3.16% 4.80% Coverage (Doubtful Loans) 47.68% 41.63% 35.52% Gross NPL/Total gross loans Gross doubtful loans/total assets LLP 7.91% 2.03% 3.15% 7.75% 2.22% 3.46% 35,111 38,214 60,880 Net Loans 0.47% 0.51% 0.57% Tier 1 ratio Total capital ratio Source: UBM from companies data 5.79% 8.82% 6.62% 8.06% 8.82% 9.25% Conclusions Credito Valtellinese is a regional co-operative bank, which has recently undergone an aggressive investment policy in response to increased competitive pressures. Notwithstanding a slight improvement in comparison to previous year, 1H04 results reveal the group s persisting weak level of efficiency, with a cost/income ratio of 78% and a ROE at 2.82%. The group s overheads steadily increased in the last years as a result of the aggressive expansion strategy undergone in the recent past, and a significant improvement in efficiency is the necessary condition for the group to reach a satisfactory level of profitability. The expansion in Sicily, a Southern region where credit quality is worse than richer north of Italy, had a negative impact on the group s credit quality, albeit at the same time representing a chance to increase asset management s and bancassurance products customer base. Capital ratios were also negatively affected by the new acquisitions, and are still thin at 8.03% and 6.03%, even after a recent capital increase completed during the first part of this year. Credito Valtellinese in rated Baa1 by Moody s, and we believe a substantial improvement in the group s efficiency and profitability, together with an improvement in its credit quality, would represent essential requirements for the group to merit a higher rating class. 6

7 BALANCE SHEET - ASSETS ( 000) Cash and central banks 67, ,245 73, ,964 88,292 Treasuries 478, , , ,724 94,447 Loans towards banks 537, , , , ,691 Loans towards customers 5,830,174 6,664,462 6,872,316 7,432,587 8,029,662 Bond 1,058, , , ,079 1,098,042 Equities 111, , , , ,401 Equity investments 64,433 61,506 62,371 67, ,644 Equity investments in other group enterprises Consolidation adjustments 90, , , ,629 93,117 Equity adjustments ,210 1,125 30,026 Tangible fixed assets 28,394 25,108 27,508 25,960 27,043 Intangible fixed assets 216, , , , ,056 Own shares 1, Other activities 418, , , , ,175 Accrued income 91,074 66,198 65,023 65,035 63,048 Total assets 8,994,534 9,430,560 9,686,859 10,240,007 11,038,693 BALANCE SHEET - LIABILITIES Debt due to banks 673, , , , ,942 Debt due to customers 4,895,188 5,602,735 5,995,105 6,306,686 6,685,362 Securities 1,897,528 2,031,187 2,054,820 2,075,129 2,319,551 bond 1,632,085 1,794,005 1,809,096 1,862,147 2,093,458 deposit certificates 206, , , , ,972 other 58,506 49,590 61,322 48,487 68,121 Other's fund managed Other liabilities 389, , , , ,371 Accruaed liabilities 80,175 55,554 51,387 37,855 44,024 Pension liabilities 54,668 55,614 57,367 56,849 58,571 Fund for risks 130,110 96,424 76, ,541 96,715 Fund for risks on credits 1, , General banking fund 27, ,773 34,083 33,786 35,847 Subordinated liabilities 263, , , , ,280 Negative consolidation differences 20,700 15,524 10,349 10,349 5,175 Negative equity differences ,591 13,130 13,059 13,508 Other's equity 179, , , , ,949 Share capital 150, , , , ,032 Equity issuance premium 157, , , , ,027 Reserves 51,964 45,365 37,299 36,929 38,521 legal reserve 30,060 32,625 35,263 35,263 38,472 own share reserve 1, statutory reserves 17,572 11,611 1,225 1,622 other reserves 3,135 1,072 - Re-valuation reserves - Net income 21,203 14,823 6,260 15,834 9,285 Total liabilities 8,994,534 9,430,560 9,686,254 10,240,007 11,038,693 7

8 P&L ( 000) Interest income 450, , , , ,307 Interest expense 216, ,974 84, ,344 71,789 Dividends 2,760 5,315 1,154 2,372 1,128 Commission income 112, ,112 77, ,774 93,696 Commission expense 9,948 14,259 7,124 14,829 8,340 Profit or loss from financial operations 8,315 12,389 9,311 13,830 4,750 Other revenues 48,366 49,168 15,516 47,512 28,403 Adminstrative expenses 256, , , , ,207 Adjustments on material imobilisations 40,277 47,136 22,706 48,129 25,128 Provisions for risks 3,801 7,187 2,490 4,139 4,869 Other costs 13,605 7,648 1,561 4,139 12,528 Adjustments and provisions on credits 38,261 41,614 22,157 46,180 26,472 Write-backs of loans and provisions on credits 15,579 17,132 8,609 13,290 7,289 Other provisions on risks ,221 - Adjustments on financial investments 1, Write-backs of financial investments Participations' net income at equity 1,351 8,091 3,150 7,123 4,734 Ordinary net income 60,432 63,127 27,249 64,958 32,546 Extraordinary income 23,666 10,127 5,245 9,939 8,299 Extraordinary expenses 5,106 10,584 4,358 8,932 7,912 Extraordinary net income 18, , Change in general banking risk fund 3,492 4,353 2,310 2,013 2,061 Taxes 36,461 38,975 18,129 43,582 18,986 Minorities 17,836 4,519 1,437 4,536 2,601 Net income 21,203 14,823 6,260 15,834 9,285 8

9 UBM Research Marco Annunziata - Head Ph: M: marco.annunziata@ubm.it Credit Research Unit Alejandra Diez Ph: M: alejandra.diez@ubm.it Rocco Fanciullo Ph: M: rocco.fanciullo@ubm.it Giorgio Frascella Ph: M: giorgio.frascella@ubm.it Federica Viola Ph: M: federica.viola@ubm.it Disclaimer This document (the "Document") has been prepared by UniCredit Banca Mobiliare SpA ( UBM ). As a company of the UniCredito Italiano Group (the Group ), UBM is involved in several businesses that may relate to Banca Piccolo Credito Valtellinese SCARL (the "Company"). UBM is currently acting as Joint Book Runner for the placing of a senior bond issued by the Company. Furthermore UBM or its affiliates and employees may hold a position or act as market maker in financial instruments related to the Company. Also note that UBM performs investment services such as repurchase agreements and stock lending involving the securities issued by the Company. Information, which is not reflected in the Document, may therefore, be available to persons connected with UBM. The Document is for information purposes only and is not intended as an offer, or solicitation of an offer to sell or to buy any financial instrument. The Document is being distributed by electronic and ordinary mail to professional investors and may not be redistributed, reproduced or published in whole or in part. Information, opinions, estimates and forecasts contained herein have been obtained from, or are based upon, sources believed by UBM to be reliable, but no representation of warranty, express or implied, is made and no responsibility or liability is accepted by UBM as to their accuracy or completeness. The Document has been approved for distribution in UK by UBM London, regulated by the FSA for the conduct of Investment Business in the UK. It has not been approved for distribution to, or for the use of, private customers as defined by the rules of the FSA. The Document may not be distributed in USA, Canada, Japan or Australia. 9