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Fitch Affirms Monte dei Paschi di Siena at 'BBB'/Negative; Viability Rating 'b', Remains on RWN
June 20, 2013 / 4:24 PM / in 4 years

Fitch Affirms Monte dei Paschi di Siena at 'BBB'/Negative; Viability Rating 'b', Remains on RWN

(The following statement was released by the rating agency) MILAN/LONDON, June 20 (Fitch) Fitch Ratings has affirmed Banca Monte dei Paschi di Siena's (MPS) Long-term Issuer Default Rating (IDR) at 'BBB', Short-term IDR at 'F3', Support Rating (SR) at '2' and Support Rating Floor (SRF) at 'BBB'. The Outlook is Negative. At the same time Fitch maintained MPS's Viability Rating (VR) at 'b' on Rating Watch Negative (RWN). A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, SR, SRF AND SENIOR DEBT MPS's Long-term IDR is at its SRF and therefore based on support from the Italian authorities. The affirmations of the IDRs, SR and SRF reflect Fitch's unchanged view that there is a high probability that MPS would continue to receive support from the Italian government given its systemic importance domestically. MPS received EUR2.2bn new capital from the government in the form of hybrid instruments issued by the bank in Q113 in addition to EUR1.9bn hybrid capital received from the government in 2009. The terms of the government hybrid instruments issued in Q113 include an option for the bank to convert the instruments into common shares. This, and the possibility that coupon payments for these new hybrid instruments under certain circumstances can be paid in the form of MPS's shares, means that the state could become a shareholder of the bank in the future, which underpins Fitch's view of a high probability of continued support for senior creditors. The Negative Outlook on MPS's Long-term IDR mirrors the Negative Outlook on Italy's 'BBB+' Long-term IDR and reflects Fitch's view that MPS's SRF would most likely be revised downward if the Italian sovereign was downgraded. A downward revision of the SRF would result in a downgrade of the bank's Long-term IDR. RATING SENSITIVITIES - IDRS, SR, SRF AND SENIOR DEBT MPS's IDRs, SR, SRF and senior debt ratings are sensitive to a change in Fitch's assumptions about the availability of sovereign support for the bank. A downgrade of Italy's sovereign rating would likely result in a downward revision of the SRF, and therefore a downgrade of the Long-term IDR, as it would indicate a reduction in the authorities' ability to provide support. The SRF and SR would also come under pressure if Fitch considered that the propensity of the authorities to provide support to all senior creditors had changed, which is not currently factored into the agency's analysis. In particular, Fitch's view on support is sensitive to developments within the regulatory and legal framework, particularly emanating from the European Commission with regard to bail-ins, centralised regulatory oversight and adjustments to deposit insurance schemes. Fitch currently expects that the Italian authorities will be able to provide support to MPS, but the European Commission has not yet granted its final approval for the provision of state aid, which the bank has already received. MPS's SR and SRF would come under pressure if changes or limitations in the provision of state aid to MPS increased the risk of reduced government support to all senior creditors, which Fitch currently does not factor into MPS's SR and SRF. Any downward revision of MPS's SRF would lead to a downgrade of the bank's IDRs. In line with Fitch's criteria, the bank's Long-term IDR is the higher of the VR and the SRF. KEY RATING DRIVERS - VR MPS's VR reflects the agency's opinion that although the prospects for MPS's ongoing viability remain weak in a difficult operating environment, the injection of hybrid capital from the government has provided an additional buffer to absorb potential future losses. The RWN on the VR reflects the fact that the state aid provided to MPS has not yet been approved by the European Commission, thus creating some uncertainty. MPS's VR reflects Fitch's expectation that the bank's operating performance will remain weak and that asset quality is likely to deteriorate further as the Italian economy remains in recession. The VR also reflects the credit and market risk the bank is exposed to through its securities portfolio, which at end-2012 included EUR25.8bn Italian government bonds. In Fitch's opinion, MPS faces challenges in implementing its business plan, and a revised restructuring plan has been submitted following the receipt of state aid for approval to the European Commission. MPS's capitalisation relies on government hybrid capital, the cost of which is high, which will make internal capital generation difficult. MPS reported a EUR3.2bn net loss for 2012, which included the impact of EUR1.65bn goodwill impairment and EUR3bn loan impairment charges. For Q113, the bank made a EUR101m net loss as loan impairment charges remained high, and Fitch expects a weak operating performance for 2013. Asset quality deteriorated further in Q113, and gross impaired loans at end-March 2013 were equal to a high 18.8% of gross loans. The bank has worked on improving cost efficiency, and 2012 and Q113 results confirmed that cost reduction efforts were ahead of plan. MPS's end-2012 Fitch Core Capital (FCC)/weighted risks ratio, which excludes EUR4.1bn government hybrid capital, was weak at 4.7%. The government hybrid capital, injected in part in 2009 and in part in Q113, is included in Fitch eligible capital (FEC). The increase in government hybrid capital in Q113 strengthens the bank's FEC/weighted risks ratio to an estimated 9.3% based on end-2012 risk-weighted assets on a pro-forma basis. In Fitch's opinion, this is still low given the high volume of unreserved impaired loans, which at end-2012 were equal to 194% of the bank's equity. RATING SENSITIVITIES - VR The bank's VR factors in weak operating profitability and is based on Fitch's expectation that pressure on profitability and asset quality will persist, but that any operating loss that could arise from continued asset quality deterioration or from the bank's securities portfolio would be manageable with MPS's current capitalisation. Losses that would require an injection of fresh capital to ensure the bank's viability would result in a downgrade of the VR. An upgrade of the VR would require a stabilisation of the bank's performance and signs that the bank can generate adequate operating profit and improve asset quality, which Fitch believes will prove challenging. Fitch will review the RWN once the final decision of the European Commission's final decision regarding the state aid is reached. An approval of state aid based on the bank's restructuring plan, which Fitch believes is the most likely outcome, would likely result in an affirmation of the VR and a removal of the RWN. If the state aid is not approved or material changes to the proposed restructuring plan are required, Fitch will review the potential impact of the additional European Commission requirements on the bank's viability. KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by MPS are all notched down from MPS's VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. The ratings of the bank's Upper Tier 2 and Tier 1 instruments and preferred securities reflects Fitch's opinion that these notes' non-performance risk in the form of non-payment of coupon is high in the coming years. The receipt of state aid means that in case of reporting a net loss MPS will be obliged not to make coupon payments where the terms of the instruments allow for non-payment. The Upper Tier 2 notes are rated one notch above the Tier 1 instruments to reflect the cumulative coupon on these instruments, whereas coupon payments on Tier 1 instruments is non-cumulative. RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of subordinated debt and other hybrid capital issued by MPS are sensitive to any change in MPS's VR and to changes in Fitch's assumptions on the probability and severity of non-performance of these notes. The RWN on the bank's Lower Tier 2 debt rating reflects the RWN on MPS's VR. The rating actions are as follows: MPS: Long-term IDR: affirmed at 'BBB'; Outlook Negative Short-term IDR: affirmed at 'F3' VR: 'b'; RWN maintained Support Rating: affirmed at '2' Support Rating Floor: affirmed at 'BBB' Debt issuance programme (senior debt): affirmed at 'BBB' Senior unsecured debt, including guaranteed notes: affirmed at 'BBB' Lower Tier 2 subordinated debt: 'B-'; RWN maintained Upper Tier 2 subordinated debt: affirmed at 'CCC' Preferred stock and Tier 1 notes: affirmed at 'CC' Contact: Primary Analyst Christian Scarafia Senior Director +39 02 87 90 87 212 Fitch Italia S.p.A. V.lo Santa Maria alla Porta, 1 20123 Milan Secondary Analyst Manuela Banfi Associate Director +39 02 87 90 87 202 Tertiary Analyst Francesca Vasciminno Senior Director +39 02 87 90 87 225 Committee Chairperson Janine Dow Senior Director +44 20 3530 1464 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on Applicable criteria, 'Global Financial Institutions Ratings Criteria', dated 15 August 2012, 'Evaluating Corporate Governance', dated 12 December 2012 and 'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 5 December 2012 are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Evaluating Corporate Governance here Assessing and Rating Bank Subordinated and Hybrid Securities here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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