Rating action

Scope Ratings GmbH (Scope) has today affirmed Istituto Bancario del Lavoro SpA's (IBL) BBB issuer rating and S-2 short-term debt rating, with a Stable Outlook.

Rating rationale

The issuer rating is driven by IBL’s prime positioning in the Italian payroll and pension-deductible loans (PDLs) sector, a low risk and high margin business.

IBL’s portfolio is adequately diversified: in 2021 the origination mix comprised around 39% of lending to public employees, 25% to private employees and 36% to pensioners. The bulk of loans is represented by PDLs and delegation of payment loans (DPs) (89% of total). DPs are similar to PDLs but are available only to certain employees and in a size up to 50% of the salary amount, instead of 20%. Another 3% of loans are represented by anticipated severance pay.

Unlike with plain vanilla personal loans, the credit risk associated with PDLs stems not from the borrower, but from the employer or the pension provider in the first instance and from the insurance company in the second instance, given the mandatory insurance coverage for loss of employment or death. Consequently, asset quality indicators have shown very low sensitivity to economic downturns.

Recent regulatory developments which have significantly reduced the risk weights associated with PDLs are changing the competitive landscape. In addition, as savings from lower capital consumption is being transferred to clients via lower pricing, this is exerting pressure on IBL’s margins. In recent times, IBL’s market share in new business has slightly declined. However, overall volumes have grown, also given the contribution from delegation of payment lending.

IBL is cautiously pursuing diversification outside its core business, into NPE investing, directly on secured non-performing exposures and through Credit Factor for unsecured. Moreover, the 2024 business plan includes commercial initiatives to strengthen the bank’s positioning in PDLs and increase deposit funding.

The bank’s asset quality metrics have marginally worsened from sound levels following the Banca di Sconto acquisition. However, Scope does not expect further deterioration outside the NPE portfolios to be acquired for investment purposes.

Under Scope’s financial institutions rating methodology, the ‘long-term sustainability’ assessment (ESG factor) captures how relevant environmental, social and governance (ESG) factors and preparedness for digital transition (D) may impact an issuer’s creditworthiness. Scope assesses IBL as ‘developing’. While acknowledging IBL’s renewed commitment to digitalisation, it also highlights key person risk relating to Mario Giordano, the bank’s CEO. He has been in his role since 1998 and as well holds a 50% shareholding (through the holding company Delta 6) in the bank.

The bank’s exposure to Italian government bonds is material. The bonds are used as collateral for short-term repo financing on the interbank market and with the Italian central counterparty (cassa di compensazione e garanzia). Given the portfolio is mostly classified as held to collect, there is not an immediate risk to earnings, however liquidity could come under stress in a scenario of increasing haircuts.

Aside from deposits and interbank funding, IBL also funds itself via TLTRO, posting securitizations and PDLs as collateral. Under the ABACO scheme, loan portfolios can be posted directly with the Bank of Italy.

Solvency metrics are strong and show an adequate buffer to IBL’s minimum capital requirements.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s opinion that the risks and opportunities associated with the new strategic direction are balanced.

Positive rating-change drivers:

While Scope sees limited upside to the rating level at this time, a significantly more diversified and increasingly stable funding profile would be considered positively.

Negative rating-change drivers:

A less than balanced approach to diversification outside the core business which may result in a higher risk profile coupled with further market share decline and reduced pricing power.

Evidence that funding and liquidity comes under stress given the extensive use of sovereign debt securities for repo funding purposes.

Overview of rating components

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: Supportive

Financial viability management: Adequate

Additional rating factors: Neutral factor

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 these Credit Ratings and/or Outlooks, (Financial Institutions Rating Methodology, 28 January 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 Ratings if the Credit Ratings were 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 Ratings: the Rated Entity, public domain, 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 these Credit Ratings 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 Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Chiara Romano, Associate Director
Person responsible for approval of the Credit Ratings: Pauline Lambert, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 12 March 2018. The Credit Rating/Outlook was last updated on 15 July 2021.
The short-term Credit Rating/Outlook was first released by Scope Ratings on 13 November 2020. The Credit Rating/Outlook was last updated on 15 July 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
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