Rating action

Scope Ratings GmbH (Scope) has today affirmed IBL Banca SpA’s (IBL) BBB issuer rating and S-2 short-term debt rating, with a Stable Outlook.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business model assessment: Consistent (low). IBL enjoys a strong market position in the Italian PDL sector, a low-risk business. Limited, albeit improving business diversification, and the group’s relatively small size constrain the business model assessment.

Despite increasing competition, IBL has managed to maintain its leading market share in the fragmented Italian PDL market. Its portfolio of PDLs has grown by more than 20% over the past five years. PDLs are a special type of personal loan where the credit risk lies not with the borrower, but with either the employer or the state (in the case of civil servants and pensioners). In addition, insurance against loss of employment or death is mandatory. This reduces the sensitivity of asset quality to economic downturns.

Since 2018, the group has pursued diversification outside its core business by investing in non-performing exposures (NPEs), directly on secured NPEs and through Credit Factor for unsecured ones. In addition, the group now has a 39% equity stake in Net Insurance, a small company with more than 20 years of experience in the PDL segment.

Operating environment assessment: Supportive (Low). Italy has a large and diversified economy but is constrained by high debt levels and limited fiscal flexibility. Being part of the European banking union, the regulatory and supervisory environment is considered highly supportive for the financial stability of banks. The assessment also considers the high fragmentation and low efficiency of the Italian banking system.

Scope arrives at an initial mapping of bbb- based on a combined assessment of the group’s operating environment and business model.

Long-term sustainability assessment (ESG factor): Developing. The assessment reflects IBL’s commitment to digitalisation in order to increase efficiency and respond to competitive pressures. In terms of governance, Scope notes that IBL’s CEO, Mario Giordano, represents a key person risk. He has been in his position since 1998 and owns 50% of the bank. Social and environmental considerations are not material for the ratings.

The long-term sustainability assessment leads to an adjusted rating anchor of bbb-.

Earnings capacity and risk exposures assessment: Supportive (+1). The assessment is based on IBL’s strong earnings performance driven by high margins and low credit costs. Profitability has come under pressure due to narrowing spreads in the PDL segment and materially higher funding costs in an elevated interest rate environment. However, Scope expects earnings to recover from 2025 as the PDL book gradually reprices.

In 2023, the group’s return on average equity was 7.1% (4.9% in 2022). An increase in loan volumes and income from the NPE business did not offset the impact of interest margin compression. At the same time, core expenses continued to rise, driven by an increase in the number of employees and the renewal of the collective labour agreement. More than a third of pre-tax profit came from a one-off gain on the disposal of a stake in Net Insurance. Scope expects profitability in 2024 to remain well below IBL’s long-term average, given the prospect of higher interest rates for a longer period and the phasing out of TLTRO III. However, from 2025 onwards, earnings are expected to recover, primarily due to the repricing of the PDL portfolio and the growing pro-rata contribution from the stake in Net Insurance.

Asset quality remains very strong, reflecting the low-risk nature of the PDL business. As of December 2023, the group’s gross NPE ratio stood at 2.8% (excluding purchased impaired assets), below the national average.

The group’s exposure to Italian government bonds is material but does not constrain the assessment. Bonds are used as collateral for short-term repo financing in the interbank market and with the Italian central counterparty (cassa di compensazione e garanzia). Gains on the securities portfolio make a positive, albeit volatile, contribution to earnings.

Financial viability management assessment: Adequate. The group maintains a sound solvency profile, with a minimum buffer of more than 300 bp to regulatory requirements as of December 2023. The issuance of a EUR 65m Tier 2 bond in 2023 was instrumental in strengthening capital buffers in a period of sustained business growth.

IBL is primarily funded by a mix of customer deposits and repos on loans and government bonds. TLTRO III, which has been an important source of funding is being repaid with a manageable impact on the group’s liquidity ratios.

The extensive use of repos results in a high asset encumbrance ratio of about 60%. Scope notes that a rapid deterioration in Italian sovereign credit quality, accompanied by a widening of credit spreads, could negatively impact IBL’s ability to refinance government bonds.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that the risks to the current rating are balanced.

The upside scenario for the ratings and Outlooks is:

• 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.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

• Inability to restore a satisfactory level of profitability in the core PDL business, or evidence that the group’s risk appetite has increased in order to achieve return targets.
   
• 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.

Debt ratings

Short-term debt: S-2/Stable. The short-term credit rating is derived from the long-term issuer credit rating. The rating is consistent with Scope’s long-term/short-term rating correspondence table.

Environmental, social and governance (ESG) factors

Please refer to the ‘long-term sustainability assessment’ under the ‘key rating drivers’ section above for the ESG analysis.

All rating actions and rated entities

IBL Banca SpA

Issuer rating: BBB/Stable, affirmed

Short-term debt rating: S-2/Stable, affirmed

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, 6 February 2024) 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or 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: Alessandro Boratti, Senior analyst
Person responsible for approval of the Credit Ratings: Pauline Lambert, Executive Director
IBL’s issuer Credit Rating/Outlook was first released by Scope Ratings on 12 March 2018. The Credit Rating/Outlook was last updated on 16 June 2023.
IBL’s Short-Term Rating/Outlook was first released by Scope Ratings on 13 November 2020. The Credit Rating/Outlook was last updated on 16 June 2023.

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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