June 20, 2017 / 3:55 PM / in 5 months

Fitch Affirms Banco di Desio e della Brianza at 'BBB-'; Stable Outlook

(The following statement was released by the rating agency) MILAN/LONDON, June 20 (Fitch) Fitch Ratings has affirmed Banco di Desio e della Brianza's (Desio) 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 available at the end of this rating action commentary. KEY RATING DRIVERS IDRS and VR AND SENIOR DEBT The bank's IDRs, VR and senior debt rating reflect the modest regional franchise of Desio, Fitch's view that its profitability is vulnerable to the interest rate and economic cycles as well as its stable, albeit undiversified, funding. The ratings also reflect the bank's weak asset quality after the acquisition of Banca Popolare di Spoleto (BPSpoleto) in 2014, and Fitch's view that the high level of unreserved impaired loans puts pressure on the bank's capitalisation. Fitch believes that the bank's fairly undiversified business model will remain vulnerable to the economic and interest rate cycles. Desio has been unable to generate satisfactory returns, which remain below global industry averages. Operating performance in 2016 and in 1Q17 suffered from low interest rates and intense competition in the areas Desio operates in, which puts pressure on net interest income. The drop in loan impairment charges since 2015 has allowed the bank to partially offset declining revenue and one-off costs for staff redundancy incentives. Regulatory capital ratios are comfortably above minimum requirements, but in our view capitalisation is not fully commensurate with risk as unreserved impaired loans at end-1Q17 were equal to almost 94% of Fitch Core Capital (FCC), which is high by international standards. Gross impaired loans were above 14% of total loans at end-1Q17, which is high by international standards but in line with other domestic banks'. The extension of Desio' prudent underwriting standards to BPSpoleto resulted in a stabilisation of impaired loans as new inflows have slowed down over the past two years. Fitch expects that the bank should start to benefit from its efforts to address its non-performing loans (NPLs) more actively than in the past through a combination of sales and strengthened workout processes. Desio's funding relies primarily on customer funding as deposits and bonds placed through the branch network account for 85% of total financial liabilities. Since the bank does not access wholesale funding, its funding structure is fairly undiversified. Liquidity is sound, with liquidity coverage and net stable funding ratios well above 100%. Contingent access to ECB facilities underpins the bank's funding and liquidity. ECB funding rose to 15% of total assets in March 2017, following Desio's participation in the last TLTRO 2 auction. 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 nonviable. 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 participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT The bank's IDRs and VR are primarily sensitive to changes in asset quality. The ratings could benefit from a material decline in impaired loans, in absolute terms and in relation to capital, as a result of the bank successfully implementing its NPL management strategy and the strengthening of its profitability. Conversely, a further increase in net impaired loans relative to FCC beyond 100% or signs that the bank's efforts to reduce impaired loans are not successful would put pressure on ratings. Weaker profitability and signs that the bank's franchise is suffering, which could be the result of the intense competition in Desio's home market, would also put ratings under pressure. 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 the bank. In Fitch's view this is highly unlikely, although not impossible. The rating actions are as follows: Long-Term IDR: affirmed at 'BBB-'; Stable Outlook Short-Term IDR: affirmed at 'F3' Viability Rating: affirmed at 'bbb-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Contact: Primary Analyst Gianluca Romeo Director + 39 02 8790 87 201 Fitch Italia S.p.A. Via Privata Maria Teresa 8 20123 Milan Secondary Analyst Francesca Vasciminno Senior Director + 39 02 87 90 87 225 Committee Chairperson Christian Scarafia Senior Director +44 203 530 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. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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