February 20, 2017 / 4:47 PM / 8 months ago

Fitch Downgrades UBI Banca to 'BBB-'; Outlook Negative

(The following statement was released by the rating agency) MILAN/LONDON, February 20 (Fitch) Fitch Ratings has downgraded UBI Banca's (UBI) Long-Term Issuer Default Rating (IDR) to 'BBB-' from 'BBB' and its Viability Rating (VR) to 'bbb-' from 'bbb'. The Outlook is Negative. A full list of rating actions is at the end of this rating action commentary. UBI's ratings were downgraded because Fitch believes that even if the bank achieves its targeted reduction of non-performing loans (NPLs), capitalisation will remain burdened by a high level of unreserved NPLs, which the bank expects to remain at a high 80% of tangible equity by 2020, in the absence of any NPL sale. The high level of unreserved impaired loans exposes the bank to changes in the valuation of the collateral for these loans, and the bank is therefore highly vulnerable to a further deterioration of the Italian operating environment. The Negative Outlook reflects Fitch's view that a further deterioration in Italy's economic environment would make reaching the bank's targets under its strategic plan more difficult, which would put capitalisation under pressure. KEY RATING DRIVERS VR, IDRs AND SENIOR DEBT UBI's Long-Term IDR is driven by its VR, which reflects the bank's weak asset quality, only acceptable capitalisation, and modest performance. The VR also reflects the bank's respectable domestic franchise as a second-tier bank, particularly in northern Italy, and adequate funding and liquidity. The quality of UBI's loan portfolio with a 14% gross impaired loan ratio at end-2016 is weak compared to international banks, but it compares favourably with domestic peers. UBI reported EUR12.5bn of gross impaired loans at end-2016, which it intends to reduce by a moderate EUR1.5bn by end-2020. In Fitch's opinion, the bank's plans are not sufficiently ambitious to strengthen the quality of its loan portfolio to become more in line with the averages in other western European countries. UBI increased the coverage of impaired loans to about 41% at end-2016 in order to bring it closer to domestic and international peers, but unreserved impaired loans remain high. The bank relies on collateral, often in the form of real estate, which is illiquid. Because of the lengthy recovery times in Italy, the bank to date has not been able to reduce its impaired loans meaningfully. UBI's end-2016 regulatory capital ratios were only acceptable. The bank reported a fully loaded CET1 ratio of 11.2% and a leverage ratio of 5.62%, both of which are well above regulatory requirements. Fitch's assessment of the bank's capitalisation incorporates our view that capital is at risk from unreserved impaired loans. We expect UBI's regulatory capital ratios to strengthen moderately over the next three years as the ratios should benefit from the badwill release from the acquisition of three small bridge banks created following a resolution process in late 2015, a EUR400m planned capital increase and tax benefits. UBI's profitability has been highly sensitive to the economic and interest-rate cycle, and we believe that earnings remain vulnerable to any further deterioration in the domestic operating environment. However, operating profit should over the coming three years gradually benefit from cost savings and from a greater focus on fee-generating wealth management businesses. Restructuring costs and loan impairment charges related to its strategic plan were booked in 1H16, which affected 2016 earnings but should not be repeated in 2017. Customer funding is stable at 70% of total funding. The bank's liquidity is acceptable and debt maturities manageable. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) The SR and SRF reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that a bank becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for resolving banks that require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. SUBORDINATED DEBT The subordinated debt issued by the bank is one notch lower than UBI's VR to reflect the below-average recovery prospects for the notes given their subordinated nature. No additional notching was applied for incremental non-performance risk as the write-down of the notes will only occur only after the point of non-viability is reached and there is no prior coupon flexibility. RATING SENSITIVITIES VR, IDRs AND SENIOR DEBT The Negative Outlook reflects Fitch's view that UBI's ratings could be downgraded if a further weakening of the Italian economic environment makes it more difficult for the bank to reduce its net impaired loans as this would affect Fitch's calculation of the bank's capitalisation. The ratings are also sensitive to UBI's ability to reach its targeted reduction of gross and net impaired loans. An upgrade of UBI's ratings would require asset quality improvements that are significantly above the bank's targets and a structural improvement in profitability. UBI's ratings are also sensitive to a further weakening in earnings generation, which could lead to a downgrade if it puts capital under further pressure. SUBORDINATED DEBT The subordinated debt rating is sensitive to the same factors that affect the bank's VR. The notes' rating is also sensitive to a change in notching, which could be triggered if Fitch reassesses the notes' loss severity or incremental non-performance risk. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) An upgrade of the SR and upward revision of the SRF are contingent on a positive change in the sovereign's propensity to support UBI. While not impossible, this is highly unlikely, in Fitch's view. The rating actions are as follows: Long-Term IDR: downgraded to 'BBB-' from 'BBB'; Outlook Negative Short-Term IDR affirmed at 'F3' Viability Rating: downgraded to 'bbb-' from 'bbb' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior debt (including programme ratings): long-term rating downgraded to 'BBB-' from "BBB", short-term rating affirmed at 'F3' Subordinated debt: long-term rating downgraded to 'BB+' from 'BBB-' Contact: Primary Analyst Francesca Vasciminno Senior Director +39 02 879087 225 Fitch Italia S.p.A. 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