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Fitch Upgrades Banca Monte dei Paschi to di Siena to 'B'; Outlook Stable
August 11, 2017 / 12:47 PM / a month ago

Fitch Upgrades Banca Monte dei Paschi to di Siena to 'B'; Outlook Stable

(The following statement was released by the rating agency) MILAN/LONDON, August 11 (Fitch) Fitch Ratings has upgraded Banca Monte dei Paschi di Siena's (MPS) Long-Term Issuer Default Rating (IDR) and senior debt ratings to 'B' from 'B-'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is at the end of this rating action commentary. The upgrade follows the recapitalisation of the bank through a EUR3.9 billion capital injection from the Italian state and a EUR4.3 billion capital increase from the conversion of junior and subordinated debt into equity. Fitch has downgraded MPS's Viability Rating (VR) to 'f' and subsequently upgraded it to 'b'. The downgrade reflects the bank's failure, according to our definitions, as MPS received an extraordinary precautionary recapitalisation from the state to cover a material capital shortfall. Additionally, in order to receive public sector funds, the bank's junior and subordinated creditors were subject to burden sharing through the mandatory conversion of junior and subordinated notes into equity. This conversion qualifies as a distressed debt exchange (DDE) under our criteria since it represents a material reduction in terms. The subsequent upgrade of the VR reflects Fitch's view of the bank's restored viability following the recapitalisation. We believe the bank's future performance is vulnerable to deterioration in the business and economic environment. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT Following the downgrade of the VR to 'f' and subsequent upgrade to 'b', MPS's Long-Term IDR is now aligned with its VR and the ratings are driven by the bank's standalone creditworthiness. The upgrade is based on Fitch's expectation that after being recapitalised, the bank will dispose of over EUR28 billion doubtful loans (sofferenze), primarily through a securitisation transaction. The upgrade also reflects Fitch's expectation that the European Central Bank will continue to regard the bank as fully meeting solvency requirements. The upgrade therefore reflects the bank's stronger capitalisation, improved asset quality as a result of the deconsolidation of its doubtful exposures and significantly lower pressure on capital from net impaired exposures. The Stable Outlook reflects the bank's stable prospects. Disposing of the entire portfolio of doubtful loans will bring the bank's gross impaired loan ratio broadly into line with the domestic industry average, down from the extremely high 36.5% at end-1Q17. The bank will retain its unlikely-to-pay exposures, which are currently 40% covered by loan impairment allowances. Following the transaction and the capital increase, net impaired loans will continue to weigh on capital, but encumbrance levels will be much lower as unreserved impaired loans will be equal to about 100% of core capital, down from over 400%. The bank's restructuring plan covers a five-year period, during which we expect a gradual improvement in profitability. However, these will depend on management's ability to realise the significant cost reductions that the bank has agreed with the authorities. The bank plans to restructure its organisation and change its processes significantly, which in our opinion encompasses execution risk. We also believe that the bank's ability to generate sustainable profit will remain very sensitive to the operating environment in Italy. We continue to assess the bank's funding and liquidity as unstable in the absence of formal external support mechanisms. The bank's funding and liquidity are supported by the EUR11 billion state-guaranteed notes issued in 1H17. In our opinion, for funding and liquidity to be assessed more positively, the bank's funding profile has to normalise as MPS has to re-establish its retail customer funding franchise and access to wholesale market funding. MPS's senior unsecured debt is rated in line with its IDRs, the 'RR4' recovery rating reflects our expectation of average recovery prospects for senior bondholders. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) The SR and SRF reflect Fitch's view that although external support is possible it cannot be relied upon. Senior creditors can no longer expect to receive 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 the resolution of banks that requires senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support. SENIOR STATE-GUARANTEED DEBT The notes' long- and short-term ratings are based on the Republic of Italy's direct, unconditional and irrevocable guarantees for the issues, which cover the notes' payments of principal and interest. Italy's guarantees were issued by the Ministry of Economy and Finance under Law Decree n. 237 dated 23 December 2016, subsequently converted into Law 15/2017. The ratings reflect Fitch's expectation that Italy will honour the guarantees provided to the noteholders in a full and timely manner. The state guarantees rank pari passu with Italy's other unsecured and unguaranteed senior obligations. SUBORDINATED DEBT The 'RR5' recovery rating for Tier 2 securities, which were valued at 100% of their nominal value upon the conversion into newly issued shares of the bank, reflects our expectation of recoveries in the range of 11% to 30% for bondholders. As a result we downgraded the securities' long-term rating to 'C' in line with our criteria for rating non-performing hybrid obligations. The ratings, including the 'RR6' Recovery Rating, of the Tier 1 instruments and preferred securities reflect the likelihood of severe economic losses being sustained by bondholders, likely to be below 10% of the notes' nominal value. Tier 1 securities were valued at 75% of their nominal value upon the conversion into newly issued shares of the bank. Fitch has withdrawn the ratings of all outstanding subordinated securities as the notes were cancelled following their mandatory conversion into equity as part of the bank's precautionary recapitalisation. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT MPS's IDRs, VR and debt ratings reflect Fitch's assumption that the bank will deconsolidate EUR26 billion doubtful loans by end-1H18 as announced in its plans. The bank's ratings would be downgraded, probably by several notches, if the securitisation transaction does not go through. The ratings could also be downgraded if the bank fails to execute on its cost reductions, the planned future impaired loan reductions or is unable to turn its profitability around. If its impaired loan ratio was to increase significantly and impaired loans returned to represent multiples of its core capitalisation the bank would be downgraded. Good progress in implementing its new strategy and a return to normalised funding and liquidity levels could over time result in an upgrade. SR AND SRF An upgrade of the SR and any upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support MPS. While not impossible, this is highly unlikely, in Fitch's view. SENIOR STATE-GUARANTEED DEBT The notes' long- and-short term ratings are sensitive to changes in Italy's IDRs. Any downgrade or upgrade of Italy's IDRs would be reflected in the notes' ratings. The notes' ratings are also sensitive to any changes in the nature of the guarantee, which we do not expect. SUBORDINATED DEBT Not applicable The rating actions are as follows: Long-Term IDR: upgraded to 'B' from 'B-'; removed from Rating Watch Evolving (RWE), Outlook Stable Short-Term IDR: affirmed at 'B', removed from Rating Watch Negative Viability Rating: downgraded to 'f' from 'c' and subsequently upgraded to 'b' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Debt issuance programme (senior debt): upgraded to 'B'/'RR4' from 'B-'/'RR4'; removed from RWE Senior unsecured debt: upgraded to 'B'/'RR4' from 'B-'/'RR4'; removed from RWE Tier 2 subordinated debt: downgraded to 'C' from 'CC', recovery rating changed to RR5 from 'RR3' and withdrawn Preferred stock and Tier 1 notes: affirmed at 'C'/'RR6' and withdrawn State-guaranteed debt: affirmed at /'BBB'/'F2' Contact: Primary Analyst Francesca Vasciminno Senior Director +39 02 879087 225 Fitch Italia S.p.A. Via Privata Maria Teresa, 8 20123 Milan Secondary Analysts Gianluca Romeo Director +39 02 8790 87 201 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Distressed Debt Exchange Rating Criteria (pub. 13 Jun 2017) here 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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