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

IBL's BBB issuer rating is driven by its prime positioning in the Italian payroll and pension-deductible loans (PDLs) sector, a relatively low risk business.

The ‘supportive’ operating environment assessment reflects Scope’s view that the Italian economy is mature and diversified, with a sound legal and regulatory framework. However, the competitive environment for the PDL sector has recently become more challenging.

The benefit of reduced risk weights for PDLs under Capital Requirements Regulation II has been transferred to consumers through lower pricing and at the same time has increased competitive pressure, with new players in the market. This trend has been amplified by rising interest rates.

After a slight decline in 2021, IBL’s market share of new business, however, has improved as origination volumes have grown above market in 2022.

IBL’s credit portfolio is adequately diversified with a mix of public and private employees and pensioners. The bulk of loans is comprised of PDLs and delegation of payment loans (DPs), with another 3% in anticipated severance pay loans.

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, given the mandatory insurance coverage for loss of employment or death. Consequently, asset quality indicators have shown very low sensitivity to economic downturns.

Scope assesses IBL as ‘developing’ in regard to long-term sustainability (ESG factor). While acknowledging IBL’s renewed commitment to digitalisation, the assessment also considers the 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.

IBL is cautiously pursuing diversification outside its core business, through NPE investing, on secured and unsecured non-performing exposures through its subsidiary Banca Capasso. In 2022, however, the contribution from this line of business and the participation in Net Insurance did not fully offset the decline in earnings from the core business.

Scope expects margins to remain under pressure this year as the repricing of liabilities occurs at a faster rate than on lending and the bank replaces TLTRO with more expensive market funding. As well, Scope expects the bank to maintain adequate buffers to capital requirements following the recent increase in Pillar 2 requirements.

The bank’s exposure to Italian government bonds remains 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). Gains from the securities portfolio represent a positive although volatile contribution to earnings.

While the bank’s funding still relies heavily on the central bank and repos of loans and sovereign bonds, customer deposits have been increasing, contributing to the stability of the funding profile.

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 view that IBL will be able to mitigate margin pressure from rising funding costs.

Negative rating-change drivers:

• The pressure on pre-provision profitability persists, reducing the ability to absorb potential losses.
   
• Tighter management of buffers to minimum capital requirements.
   
• Challenges to the bank’s funding profile, as market conditions may hinder the ability to extensively use Italian sovereign debt securities for repo funding purposes.

Scope sees little upside to the rating level at this time as operating conditions have become more challenging, limiting a material strengthening in the bank’s financial performance.

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 Outlooks, (Financial Institutions Rating Methodology, 7 February 2023), 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: 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 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 Outlooks and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Outlook was 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 Outlooks are UK-endorsed.
Lead analyst: Chiara Romano, Associate Director
Person responsible for approval of the Credit Ratings: Pauline Lambert, Executive Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 12 March 2018. The Credit Rating/Outlook was last updated on 5 July 2022.
The short-term Credit Rating/Outlook was first released by Scope Ratings on 13 November 2020. The Credit Rating/Outlook was last updated on 5 July 2022.

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

Conditions of use/exclusion of liability
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