Rating action

Scope Ratings GmbH (Scope) has today affirmed its issuer rating of BBB- to Banca Popolare di Sondrio SpA (BPS) and changed the Outlook to Positive from Stable.

Rating rationale

The change in Outlook is driven by the improvement in BPS’ credit fundamentals over the past two years. In particular, the bank managed to halve its stock of non-performing exposures, selling more than EUR 1.8bn of loans. At year-end 2021, the gross non-performing exposure ratio stood at 5.8% of loans. While this is still above average for large Italian banking groups, BPS is no longer an outlier. Scope also has a favourable view of the group’s performance throughout the pandemic. Despite precautionary provisions and volatile trading income, profitability remained resilient in 2020 and rebounded strongly in 2021, driven by strong growth in core revenues. 2021 net profit of EUR 268m was the highest on record for the group.

The issuer rating reflects BPS’ established retail and commercial banking franchise with solid market shares in the wealthy Italian region of Lombardy, which produces a moderately stable and predictable revenue and earnings stream. BPS has immaterial market shares in Italy but a dominant position in its home province of Sondrio and relevant market positions in the Lecco and Como provinces. BPS is also the parent company of the BPS group, which includes a small bank in Switzerland (BPS Suisse), Factorit and BNT Banca, which specialises in agricultural business loans and payroll deductible loans.

The improvement in Scope’s long-term sustainability assessment from ‘lagging’ to ‘developing’ acknowledges the group’s progress in improving its corporate governance, including the recent transformation into a joint stock company and managerial reorganisation. The corporate transformation was completed in December 2021 and has not resulted in a material weakening of the group’s financial profile. Scope’s long-term sustainability analysis also considers the group’s cooperative roots and its attention to the territories in which it operates, indicating strong social responsibility and a good balancing of the different stakeholders’ interests. Scope believes that there is material room for improvement in the bank’s preparedness for digital competition.

While low by international standards, BPS’ profitability track record is better than the average for Italian banks. Stable revenues, good cost efficiency, a moderate level of loan losses and the lack of large one-off restructuring costs have helped the issuer maintain a positive bottom line for the past decade. This sets it apart from many peers, which have required material capital injections.

At the end of December 2021, BPS had a CET1 ratio of 15.8% on a transitional basis (15.7% fully loaded), which is well ahead of requirements. Scope notes that the bank could further optimise its capital structure via the issuance of capital securities, which are currently underutilised. The healthy buffers to capital requirements, alongside comfortable liquidity and funding regulatory ratios, are a key support to the rating. BPS is primarily funded by deposits, though it also uses the ECB’s TLTRO lines.

Outlook and rating-change drivers

The Outlook is Positive, reflecting Scope’s expectation that the issuer’s credit profile will continue to improve over the next 12-18 months. Scope expects BPS’ strategic focus to start to shift from balance sheet repair to revenue and earnings growth.

What could move the credit rating up:

• Further improvements in the group’s asset quality, and confirmation that asset quality will not materially deteriorate as a result of the decline in the macro outlook.
   
• Material growth in revenues without a significant change in the group’s overall risk profile.

What could move the credit rating down:

•  A significant deterioration in the group’s buffer to capital requirements, currently a key support for the rating.

Overview of BPS’ rating construct

Operating environment: supportive

Business model: consistent

Initial mapping refinement: low

Initial mapping: bbb-/bbb

Long-term sustainability: developing

Adjusted anchor: bbb-

Earnings capacity and risk exposures: constraining

Financial viability management: comfortable

Additional rating factors: neutral

Standalone assessment: bbb-

External support: not applicable

Issuer rating: BBB-

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

Methodology
The methodology used for this Credit Rating and Outlook, (Financial Institutions Rating Methodology, 28 January 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating was to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting this Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating and Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and Outlook is UK-endorsed.
Lead analyst: Marco Troiano, Managing Director
Person responsible for approval of the Credit Rating: Pauline Lambert, Executive Director
The Credit Rating/Outlook was first released by Scope Ratings on 10 September 2018. The Credit Rating/Outlook was last updated on 31 March 2021. 

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.