Today, Scope Ratings has affirmed all its ratings on the Italian banks it publicly rates. While affirming the bank’s long-term ratings – A for Intesa and UniCredit; BBB for IBL – Scope has changed their Outlook to Stable from Negative.

The drivers for the change in Outlook are the resilience of the banks’ fundamentals despite a softer macro environment in recent quarters, the more accommodating monetary policy outlook, and improvements in investor sentiment towards Italian risk. To be furthered by the upcoming launch of TLTRO3 auctions in September, these have led to more favourable funding conditions for the sector.

Scope’s base case is that the financial fundamentals of Italian banks are likely to continue to improve, with respect to further progress on the disposal of non-performing exposures and a firming up of profitability. At the same time, Scope believes that there remains a degree of policy uncertainty and the likelihood of a heightening of Italian sovereign risk around forthcoming 2020 budget negotiations this autumn, potentially bringing renewed pressure in Italian markets – even if any sell-off would be capped by an accommodative ECB. Should sovereign risk bring volatility, this risk is manageable for Italian banks unless it translates into a protracted disruption to funding markets or fears of a sovereign debt restructuring or currency breakup. Scope views the likelihood of a sovereign debt restructuring or currency breakup as low.

On balance, Scope deems risks to the current ratings of the three banks to be broadly balanced.

The following ratings were affirmed. Except for the short-term ratings, for which the rating Outlook remains unchanged (Stable), all other Outlooks have been changed to Stable from Negative:

UniCredit SpA:

• Issuer rating at A
• Preferred senior unsecured debt at A
• Non-preferred senior unsecured debt at A-
• Tier 2 ratings at BBB
• Short-term rating at S-1

Intesa Sanpaolo SpA:

• Issuer rating at A
• Preferred senior unsecured debt at A
• Non-preferred senior unsecured debt at A-
• AT1 ratings at BB+
• Short-term rating at S-1

IBL Banca SpA:

• Issuer rating at BBB

Intesa Sanpaolo SpA

Intesa’s ratings are driven by the bank’s strong capital position and resilient profitability despite the challenging operating environment in Italy, where 81% of the loan portfolio is based. The group has been the leading retail and commercial bank in Italy since the merger of Banca Intesa and Sanpaolo IMI in 2007. Group earnings and asset quality have suffered from the weak domestic economic environment in the past, but pre-provision profitability has been resilient, and the group has remained profitable if the large goodwill write-downs in 2011 and 2013 are excluded.
The 2018-21 business plan targets a return on tangible equity of 14.6%, with growth in commission income a key driver of the improved profitability. Cost savings, including a significant reduction in both the branch network and headcount, are also forecast to contribute significantly to profit growth. The ability to generate recurring earnings and capital while keeping risk under control is a key support for the ratings. With the large disposal of bad loans in 2018, Intesa has materially de-risked its balance sheet, and Scope believes the bank could exceed its 2021 asset quality targets.
Despite a presence in central and eastern Europe, Intesa’s operations are primarily domestic. Significant holdings in Italian sovereign debt particularly expose it to market confidence in Italian banks and in Italy in general. However, Scope notes the ongoing diversification in its securities portfolio.
Among key positive rating change drivers, Scope identifies a further material clean-up of non-performing exposures and an increase in the group’s geographic diversification. Conversely, ratings would be negatively affected by a deterioration in operating performance. Scope also flags that any unlikely Italian exit from the euro area or sovereign debt restructuring would materially raise uncertainty, with negative implications for the ratings.

UniCredit SpA

UniCredit’s ratings are driven by its well-positioned retail and commercial banking franchise in Italy, Germany, Austria, several eastern European countries, as well as Russia and Turkey.
The extensive ‘Transform 2019’ restructuring programme has been largely executed. Indeed, UniCredit is well ahead of its business plan in many aspects, especially in terms of non-performing-loan and cost reduction. The weak economic environment in Italy has weighed heavily on asset quality in the last decade, but the group has over the past two years tackled its asset quality decisively, and de-risking is running ahead of original targets.
The bank’s capital position is satisfactory and in line with management targets, though the capital build-up in recent years has been supported by rights issues and asset sales.
The ratings could be upgraded subject to further material improvements in the bank’s fundamentals, including asset quality, efficiency and profitability. Conversely, a further deterioration in operating conditions in Turkey is a key downside risk. Scope also flags that an Italian exit from the euro area or sovereign debt restructuring would materially raise uncertainty, with negative implications for the ratings.

IBL Banca SpA

IBL’s issuer rating is based on the low-risk business model of the bank, a leader in the Italian market for payroll and pension deducted loans (PDL), which is a high-margin, low-risk personal loan product with a long history in Italy. The rating acknowledges IBL’s recent attempts at broadening its business model, by setting up partnerships in bancassurance and in NPL investments and management, but Scope notes that these investments remain minimal compared to the core business. The ratings also take account of the large exposure to Italian government bonds, mostly financed via short-term repos. This represents a large risk concentration.
IBL’s financial fundamentals are strong, including high profitability, a solid capital position and low incidence of non-performing loans. Aside from repo funding for the government bond portfolio, IBL funds itself through deposits and securitisations of its loan book, which, of late, have mostly been retained and used as collateral for ECB term repo operations.
Scope also highlights the key person risk regarding Mario Giordano, the bank’s CEO since 1998.
Among key rating change drivers, a reduction in the carry trade on government securities would be credit-positive while any aggressive expansion into risky lending segments would be negative. Scope also signals that ratings could be negatively affected by declines in the value of the sizeable government bond portfolio, either through a sovereign debt restructuring or increased doubts over Italy’s continued membership in the euro area.

Stress testing & Cash flow analysis
No stress testing was performed. No cash flow analysis was performed

Methodology
The methodologies used for the ratings and/or rating outlooks (Bank Ratings Methodology, Capital Securities methodology) are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
IBL ISTITUTO BANCARIO DEL LAVORO SPA participated in the rating process.
The ratings for UNICREDIT SPA & INTESA SANPAOLO SPA were not requested by the rated entity or its agents. UNICREDIT SPA & INTESA SANPAOLO SPA and/or its agents participated the rating process. Scope had no access to accounts, management and/or other relevant internal documents for UNICREDIT SPA & INTESA SANPAOLO SPA or related third party.
The following substantially material sources of information were used to prepare the credit rating for INTESA SANPAOLO SPA, UNICREDIT SPA & IBL ISTITUTO BANCARIO DEL LAVORO SPA: public domain, the rated entity and third parties.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.”
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit ratings and/or rating outlooks are issued by Scope Ratings GmbH.
Lead analyst Marco Troiano, Executive Director
Person responsible for approval of the ratings: Dierk Brandenburg, Managing Director
The ratings/outlooks for IBL ISTITUTO BANCARIO DEL LAVORO SPA were first released by Scope on 12.03.2019. The ratings/outlooks were last updated on 30.10.2018.
The Unicredit issuer rating/outlook was first released by Scope on 11.06.2014. The rating/outlook was last updated on 30.10.2018. The Unicredit short-term rating/outlook was first released by Scope on 11.06.2014. The rating/outlook was last updated on 30.10.2018. The Unicredit senior unsecured debt rating/outlook was first released by Scope on 11.06.2014. The rating/outlook was last updated on 30.10.2018. The Unicredit non-preferred senior unsecured debt rating/outlook was first released by Scope on 30.10.2018. The Unicredit Tier 2 securities rating/outlook was first released by Scope on 19.12.2016. The rating/outlook was last updated on 30.10.2018.
The Intesa SanPaolo issuer rating/outlook was first released by Scope on 11.06.2014. The rating/outlook was last updated on 30.10.2018. The Intesa SanPaolo short-term rating/outlook was first released by Scope on 11.06.2014. The rating/outlook was last updated on 30.10.2018. The Intesa SanPaolo senior unsecured debt rating/outlook was first released by Scope on 11.06.2014. The rating/outlook was last updated on 30.10.2018. The Intesa SanPaolo non-preferred senior unsecured debt rating/outlook was first released by Scope on 30.10.2018. The Intesa SanPaolo Additional Tier 1 notes rating/outlook was first released by Scope on 30.10.2018.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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