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Fitch Affirms Credito Emiliano at 'BBB'; Outlook Stable
June 20, 2017 / 3:50 PM / 3 months ago

Fitch Affirms Credito Emiliano at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) LONDON/MILAN, June 20 (Fitch) Fitch Ratings has affirmed Credito Emiliano's (Credem) Long-Term Issuer Default Rating (IDR) at 'BBB' and Viability Rating (VR) at 'bbb'. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary. Fitch has assigned a 'BBB(dcr)' Derivative Counterparty Rating (DCR) to Credem as part of its roll-out of DCRs to significant derivative counterparties in western Europe and the US as the bank is a swap counterparty to Fitch-rated transactions. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. KEY RATING DRIVERS VR, IDRS, SENIOR DEBT AND DCR The IDRs, VR, senior debt rating and DCR of Credem reflect its diversified and stable business model, which has to date resulted in a more resilient profitability and healthier asset quality than its Italian peers. Credem's company profile has helped the bank to generate stable fees and commissions, with income from its wealth management and insurance businesses providing a cushion to protect the bank from the impact of current low interest rates on profitability. Strong underwriting standards and a low risk appetite have also helped to keep loan impairment charges low and stable during a time of high loan impairments in the Italian banking sector and have helped support profitability. Operating costs, however, are high at Credem, both as a proportion of revenues and of assets, and have been affected by the bank's highly centralised loan approval process, investments in IT systems, controls, compliance structures and expansion of its sales network. Credem's resilient profitability has kept internal capital generation sound. We view capitalisation as being in line with the bank's risk profile, with a strong buffer maintained between the bank's 13.7% end-2016 phased-in CET1 capital ratio and minimum regulatory requirements. Fitch believes that maintaining capitalisation higher than minimum requirements is justified at Credem due to unreserved impaired loans moderately weighing on capitalisation (at end-2016 these were equal to about 38% of Fitch Core Capital). Credem's asset quality is healthy, particularly in light of the high level of non-performing loans in Italy. Credem reported a gross impaired loans/ gross loans ratio of about 5.6% at end-2016, and we believe that this has been achieved by strong underwriting standards towards domestic SMEs and by avoiding single-name and industry concentrations. The bank has been able to reduce impaired loans through small amounts of write-offs and sales every year, which, however, has resulted in below-average impairment reserve coverage. Sales have generally been achieved at book value. We view Credem's funding as stable. Funding benefits from a solid core customer deposit base and deposits have benefited recently from inflows from distressed Italian banks. Funding is undiversified and apart from deposits consists largely of covered bonds and funding from the ECB's Targeted Long-term Refinancing Operations (TLTROs). The bank has some outstanding retail bonds but is no longer issuing these. Its liquidity is supported by good access to central bank facilities. The bank's 'F2' Short-Term IDR is the higher of the two possibilities for a 'BBB' Long-Term IDR to reflect the strength of the bank's short-term liquidity. The DCR is at the same level as the Long-Term IDR because in Italy derivative counterparties have no preferential legal status over other senior obligations. SUPPORT RATING AND SUPPORT RATING FLOOR The bank's Support Rating and Support Rating Floor reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign if a bank becomes non-viable. The EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for resolving banks that require senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Credem's subordinated Tier 2 debt is rated one notch below the bank's VR for loss severity to reflect below-average recovery prospects. No notching is applied for incremental non-performance risk because write-down of the notes will only occur once the point of non-viability is reached and there is no coupon flexibility prior to non-viability. RATING SENSITIVITIES VR, IDRS, SENIOR DEBT AND DCR Credem's ratings are primarily sensitive to a material deterioration in asset quality, which could be the result of an unexpected weakening of underwriting standards, or to a further deterioration of the domestic economy. Ratings could also be downgraded if capitalisation falls as a result of strong loan growth or if the bank increases its risk appetite. Given the bank's purely domestic focus, the bank ratings are sensitive to deterioration in the operating environment in Italy and to Italy's sovereign rating. Any upgrade of the ratings would require an upgrade of Italy's sovereign rating. Credem's Short-Term IDR would be downgraded if the bank's liquidity declines or if, for example it is unable to successfully manage the tapering of ECB's bond buying programme and replace central bank funding with market funding. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support Credem. While not impossible, in Fitch's view this is highly unlikely. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of subordinated debt are sensitive to a change in the bank's VR. The rating is also sensitive to a change in notching if Fitch revises its assessment of loss severity or incremental non-performance risk. The rating actions are as follows: Credito Emiliano Long-Term IDR: affirmed at 'BBB'; Outlook Stable Short-Term IDR: affirmed at 'F2' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: assigned at 'BBB(dcr)' Senior unsecured EMTN programme: affirmed at 'BBB' Subordinated notes XS1199020295, XS1506498200: affirmed at 'BBB-' Contacts: Primary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Secondary Analyst Manuela Banfi Associate Director +39 02 87 90 87 202 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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