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Fitch Affirms Intesa Sanpaolo at 'BBB+'; Outlook Negative
February 20, 2017 / 4:27 PM / 10 months ago

Fitch Affirms Intesa Sanpaolo at 'BBB+'; Outlook Negative

(The following statement was released by the rating agency) MILAN/LONDON, February 20 (Fitch) Fitch Ratings has affirmed Intesa Sanpaolo S.p.A.'s (IntesaSP) Long-Term Issuer Default Rating (IDR) at 'BBB+' and its Viability Rating (VR) at 'bbb+'. Fitch has also affirmed subsidiary Banca IMI's Long-Term IDR at 'BBB+'. The Outlooks are Negative. A full list of rating actions is at the end of this rating action commentary. In addition, Fitch has assigned 'BBB+(dcr)' Derivative Counterparty Ratings (DCRs) to IntesaSP and Banca IMI as part of its roll-out of DCRs to significant derivative counterparties in western Europe and the US. 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 VRs, IDRS, DCR AND SENIOR DEBT IntesaSP's Long-Term IDR is driven by the bank's VR, which reflects the diversified and stable business model of IntesaSP, combined with its leading domestic franchise in various market segments. IntesaSP's company profile has helped the group to generate profitability that has remained above domestic peers' in a challenging operating environment. The bank's good execution track record has enabled it to generate consistent profitability through the economic cycle, which differentiates the bank domestically. The ratings also reflect Fitch's view of the group's resilient capitalisation and robust funding structure, but also the group's asset quality, which remains weak compared with international peers, and the high level of unreserved impaired loans, which weighs on capitalisation. The Negative Outlook primarily reflects Fitch's view that IntesaSP's ratings are likely to be downgraded if Italy's Long-Term IDR (BBB+/Negative) is downgraded as Fitch believes a further deterioration in the Italian operating environment poses a downside risk to the bank. IntesaSP's diversified revenues, which include a high portion of fee income, have helped the group's performance, which has proved more resilient to the low-interest rate environment than its domestic peers. Operating profitability also benefits from a limited contribution from more volatile gains on securities, which renders IntesaSP's revenue structure more reliable than peers'. The bank generated some one-off gains in 2016, which it used to increase the coverage of its impaired exposures, for loan write offs and to offset extraordinary charges related to the banking sector. IntesaSP's asset quality is its key weakness. IntesaSP's asset quality metrics compare well domestically but, despite some modest improvements, remain weaker than those seen at international peers. However, IntesaSP has started to address its large portfolio of impaired loans by increasing write-offs, higher coverage and some limited portfolio disposals. Together with a reduced inflow of new impaired loans, slightly improved recoveries and mild increase in lending volumes, this led to an improvement in the bank's gross impaired loan ratio to about 15% at end-2016 from 17% at end-2015. In our opinion, the coverage of impaired loans at 52.5% at end-2016 was adequate. The bank targets a 10.5% gross impaired loan ratio by end-2019, which Fitch believes is achievable. However, IntesaSP's strategy to target a gradual workout of impaired loans means that future improvements in asset quality ratios will at least partly depend on Italy's operating environment. Unreserved impaired loans still represented above 70% of Fitch Core Capital at end-2016, but improved from over 80% at end-2015. The granularity of the group's loan exposure partly mitigates the risk of sudden shocks in asset performance. Fitch believes that this ratio could improve in the medium-term if IntesaSP manages to improve asset quality. The bank maintains regulatory capital ratios with satisfactory buffers above regulatory requirements: at end-2016, IntesaSP reported a 12.9% fully-loaded CET1 ratio and a 6.3% leverage ratio. IntesaSP's funding is adequately diversified and benefits from stable and ample customer deposits and from an established access to different forms of wholesale funding. Liquidity is stable and backed by a large portfolio of liquid assets, which provides an adequate buffer of unencumbered assets. Fitch has assigned a DCR to IntesaSP since the bank has significant derivatives activity and is swap counterparty to Fitch-rated structured finance transactions. 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 in a resolution scenario. The ratings of the senior debt issued by IntesaSP's funding vehicles, Intesa Sanpaolo Bank Ireland, Intesa Sanpaolo Bank Luxembourg, S.A. and Intesa Funding LLC, are equalised with that of the parent since it is unconditionally and irrevocably guaranteed by IntesaSP. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) IntesaSP's SR and SRF reflect Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that the 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 AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by the bank are all notched down from IntesaSP's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. AT1 notes are rated five notches below the bank's VR, comprising two notches for loss severity relative to senior unsecured creditors and three notches for incremental non-performance risk relative to the VR. The notching for non-performance risk reflects the instruments' fully discretionary interest payment. SUBSIDIARY AND AFFILIATED COMPANY The ratings of IntesaSP's Italian subsidiary Banca IMI reflect Fitch's view of its core function and extremely high integration within the group. Fitch has assigned a DCR to Banca IMI since the bank has significant derivatives activity and is swap counterparty to some Fitch-rated structured finance transactions. The DCR is at the same level as the Long-Term IDR because under Italian legislation, derivative counterparties have no preferential status over other senior obligations in a resolution scenario. RATING SENSITIVITIES VRs, IDRS, DCR AND SENIOR DEBT IntesaSP's ratings are primarily sensitive to deterioration in the operating environment in Italy and to Italy's sovereign ratings. If Italy's sovereign rating is downgraded, IntesaSP's VR, IDRs, DCR and debt ratings would be downgraded. IntesaSP's ratings could also be downgraded if the bank does not meet its impaired loan reduction targets and its capital remains highly exposed to unreserved impaired loans. Similarly, deterioration in the bank's funding and liquidity would put pressure on the ratings, as would prioritising dividend distribution over capital retention in case of need. The ratings of the senior debt issued by Intesa Sanpaolo Bank Ireland, Intesa Sanpaolo Bank Luxembourg, S.A. and Intesa Funding LLC, are sensitive to the same considerations that affect the senior unsecured debt issued by the parent. 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 IntesaSP. While not impossible, this is highly unlikely, in Fitch's view. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of the securities are sensitive to a change in the bank's VR. The ratings are also sensitive to a change in the notes' notching, which could arise if Fitch changes its assessment of their non-performance relative to the risk captured in the VR. For AT1 issues this could reflect a change in capital management or flexibility or an unexpected shift in regulatory buffers and requirements, for example. SUBSIDIARY AND AFFILIATED COMPANIES As Banca IMI's ratings are based on its parent's Long-Term IDR, they are sensitive to changes in IntesaSP's propensity to provide support respectively and to changes in the parent's Long-Term IDR. The rating actions are as follows: IntesaSP Long-Term IDR: affirmed at 'BBB+'; Outlook Negative Short-Term IDR: affirmed at 'F2' Viability Rating: affirmed at 'bbb+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: assigned at 'BBB+(dcr)' Senior debt (including debt issuance programmes): affirmed at 'BBB+'/ 'F2' Commercial paper/certificate of deposit programmes: affirmed at 'F2' Short-term deposits affirmed at 'F2' Senior market-linked notes: affirmed at 'BBB+emr' Subordinated lower Tier II debt: affirmed at 'BBB' Subordinated upper Tier II debt: affirmed at 'BB+' Tier 1 instruments: affirmed at 'BB' AT1 notes: affirmed at 'BB-' Banca IMI S.p.A.: Long-Term IDR: affirmed at 'BBB+'; Outlook Negative Short-Term IDR: affirmed at 'F2' Support Rating: affirmed at '2' Derivative Counterparty Rating: assigned at 'BBB+(dcr)' Senior debt (including programme ratings): affirmed at 'BBB+' Intesa Sanpaolo Bank Ireland plc: Commercial paper/short-term debt affirmed at 'F2' Senior unsecured debt: affirmed at 'BBB+' Intesa Sanpaolo Bank Luxembourg, S.A.: Commercial paper/short-term debt: affirmed at 'F2' Senior unsecured debt: affirmed at 'BBB+' Intesa Funding LLC: US commercial paper programme: affirmed at 'F2' Contact: Primary Analyst Francesca Vasciminno Senior Director +39 02 87 90 87 225 Fitch Italia S.p.A. 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