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Fitch Affirms Intesa at 'BBB'/Stable; Downgrades Vicenza to 'D' and VR to 'f'
June 27, 2017 / 3:17 PM / 6 months ago

Fitch Affirms Intesa at 'BBB'/Stable; Downgrades Vicenza to 'D' and VR to 'f'

(The following statement was released by the rating agency) MILAN/LONDON, June 27 (Fitch) Fitch Ratings has downgraded Banca Popolare di Vicenza's (Vicenza) Long-and Short-Term Issuer Default Ratings (IDRs) to 'D' from 'CCC' and 'C' respectively and removed them from Rating Watch Evolving (RWE). Fitch also downgraded Vicenza's Viability Rating (VR) to 'f' from 'cc'. The Rating Watch on Vicenza's senior debt has been revised to Positive (RWP) from RWE. Fitch has also affirmed Intesa Sanpaolo's (IntesaSP) IDRs and VR at 'BBB'/'F2' and 'bbb' respectively. The Outlook on Intesa is Stable. At the same time Fitch has affirmed Veneto Banca's state-guaranteed notes at 'BBB'. A full list of rating actions is at the end of this rating action commentary. The rating action follows the announcement that Vicenza and Veneto Banca were placed into liquidation after the Italian government passed a law decree (n.99, 25 June 2017) on Sunday. On 23 June, the European Central Bank determined that the banks were 'failing or likely to fail' as a result of lack of capital and, on the same date, the Single Resolution Board concluded that a resolution action was not necessary in the public interest, so that normal Italian insolvency proceedings would achieve the resolution objectives. The decree includes the sale of certain bank assets and liabilities to IntesaSP. These assets include performing loans, financial assets, tax assets, customer deposits, senior bonds (including state-guaranteed notes), assets under management and administration, branches and staff as well as certain subsidiaries. IntesaSP has not acquired the two banks' equity and subordinated debt as well as claims, litigations, non-performing exposures and other subsidiaries and shareholdings. The terms of the transaction allow IntesaSP to return the assets and liabilities to the two banks if the government decree is not converted into law, which requires a vote in both chambers of the Italian government within 60 days of the government decree being promulgated, or if the final law results in an increased cost to IntesaSP. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT Vicenza The downgrade of Vicenza's Long- and Short-Term IDRs to 'D' and of the VR to 'f' reflects that the bank has been placed into liquidation. The RWP on Vicenza's senior unsecured bonds reflects Fitch's expectation that these will be upgraded to the same level as IntesaSP's senior debt once the government decree has been converted into law, which will make the transfer of senior debt to IntesaSP final. IntesaSP The affirmation of the ratings reflects our opinion that the transaction does not affect the VR of the bank. We believe that the transaction is neutral to the bank's risk appetite, capitalisation and asset quality. IntesaSP receives a cash contribution from the Italian government to cover the impact of the asset transfer on its capital ratios, which will allow the bank to maintain a transitional CET1 ratio of 12.5%. The cash contribution will also cover integration and rationalisation costs related to the acquisition. In addition, the government will guarantee against potential risks, obligations and claims on IntesaSP related to events prior to the sale. Vicenza's and Veneto's non-performing exposures will remain in the banks that have been placed under liquidation. IntesaSP has the right to return up to EUR4 billion high-risk performing loans to the banks in liquidation by 31 December 2020 if these loans become impaired. In total, IntesaSP will receive EUR4.875 billion in cash from the Italian government and EUR1.5 billion as public guarantees against potential legal risks. IntesaSP's ratings continue to reflect the bank's diversified and stable business model, combined with a leading domestic franchise in various market segments, which will become stronger in North-Eastern Italy following the transfer of Vicenza's and Veneto Banca's selected activities. IntesaSP's company profile has helped the group generate profitability that has remained above domestic peers' in a challenging operating environment. The bank's sound execution track record has enabled IntesaSP to generate consistent profitability through the economic cycle, which differentiates the bank from its domestic peers. The ratings further reflect Fitch's view of the group's resilient capitalisation and robust funding structure, but also the group's asset quality, which remains weak compared with international peers, and a high level of unreserved impaired loans, which weighs on capitalisation. IntesaSP's Short-Term IDR of 'F2' is the higher of the two possibilities for a 'BBB' Long-Term IDR under our criteria, reflecting that the bank's short-term liquidity profile is supported by ready access to central bank facilities given the ECB's accommodative policy. The ratings of the senior debt issued by IntesaSP's funding vehicles, Intesa Sanpaolo Bank Ireland, Intesa Sanpaolo Bank Luxembourg, S.A. and Intesa Funding LLC, are equalised with that of the parent because the debt is unconditionally and irrevocably guaranteed by IntesaSP and Fitch expects the parent to honour this guarantee. DCR IntesaSP IntesaSP's DCR is at the same level as the bank's Long-Term IDRs because in Italy derivative counterparties have no preferential legal status over other senior obligations in a resolution scenario. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) Vicenza, IntesaSP Despite Vicenza's senior creditors suffering no losses as a result of the regulatory action, the SR and SRF reflect Fitch's view that although external support is possible it cannot be relied upon. Senior creditors can no longer expect to receive full extraordinary support from the sovereign in the event that the bank becomes non-viable. The EU's Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) for eurozone banks provide a framework for the resolution of banks that requires senior creditors to participate in losses, if necessary, instead of or ahead of a bank receiving sovereign support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Vicenza, IntesaSP The subordinated Tier 2 debt issued by Vicenza is downgraded to 'C'/Recovery Rating 'RR6' to reflect poor recovery prospects for the subordinated bondholders that remain in the bank that is being liquidated. The Italian state will become a senior creditor of the liquidated bank, which means that recovery prospects for junior creditors out of the liquidation are poor. Subordinated debt and other hybrid capital securities issued by IntesaSP are notched down from the VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. Tier 2 subordinated debt is rated one notch below the VR for loss severity to reflect below-average recovery prospects. No notching is applied for incremental non-performance risk because write-down of the notes will only occur once the point of non-viability is reached and there is no coupon flexibility before non-viability. The legacy Upper Tier 2 debt rating reflects its higher loss severity given its subordination to senior unsecured and subordinated Tier 2 obligations (two notches) and incremental non-performance risk (one notch) for its cumulative coupon deferral subject to constraints. Legacy Tier 1 notes are notched down four times from the VR, two notches for loss severity for deep subordination and another two for non-performance risk as coupon deferral is constrained by look-back clauses. Additional Tier 1 notes are rated five notches below the VR, two notches for loss severity relative to senior unsecured creditors and three notches for incremental non-performance risk, the latter notching reflecting the instruments' fully discretionary interest payment. SENIOR STATE-GUARANTEED SECURITIES Vicenza, Veneto Banca The long-term rating of the state-guaranteed debt is based on Italy's direct, unconditional and irrevocable guarantee for the issues, which covers payments of both principal and interest. Italy's guarantee was issued by the Ministry of Economy and Finance under Law Decree 23 December 2016, n. 237, subsequently converted into law 15/2017. The ratings reflect Fitch's expectation that Italy will honour the guarantee provided to the noteholders in a full and timely manner. The state guarantee ranks pari passu with Italy's other unsecured and unguaranteed senior obligations. As a result, the notes' long-term ratings are in line with Italy's 'BBB' Long-Term IDR. Under the decree, the notes are being transferred to IntesaSP. IntesaSP will have the right to cancel the guarantee. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Vicenza Fitch expects to withdraw Vicenza's IDRs and VR once the decree is converted into law without material amendments and the sale is formally completed in line with original expectations. Fitch expects to simultaneously upgrade Vicenza's senior unsecured debt that has been transferred to IntesaSP to 'BBB', in line with IntesaSP's senior debt rating. If the decree is not converted into law or if the transaction does not proceed as planned, which Fitch currently does not expect, the senior debt would likely be downgraded as losses to senior creditors would become more likely. IntesaSP IntesaSP's ratings could be downgraded if the bank does not meet its impaired loan reduction targets and its capital remains highly exposed to unreserved impaired loans. Similarly, deterioration in the bank's funding and liquidity would put pressure on the ratings, as would prioritising dividend distribution over capital retention in case of need. IntesaSP's ratings remain sensitive to deterioration in the operating environment in Italy and to Italy's sovereign ratings. Its Short-Term IDR would be downgraded if the bank is unable to successfully manage the tapered ECB asset buying programme and replace central bank funding with market funding. An upgrade of the ratings would require a significant improvement of the bank's asset quality and, given the bank's overwhelmingly domestic operations, an upgrade of Italy's sovereign rating. The ratings of the senior debt issued by Intesa Sanpaolo Bank Ireland, Intesa Sanpaolo Bank Luxembourg, S.A. and Intesa Funding LLC are sensitive to the same considerations that affect the senior unsecured debt issued by the parent. DCR IntesaSP The DCR is sensitive to changes to IntesaSP's Long-Term IDR. SR AND SRF IntesaSP, Vicenza An upgrade of the SR and any upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support Italian banks. While not impossible, this is highly unlikely, in Fitch's view. We expect to withdraw Vicenza's SR and SRF once the other issuer ratings are withdrawn. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES IntesaSP, Vicenza IntesaSP's subordinated debt and hybrid securities' ratings are primarily sensitive to changes in the VR, from which they are notched. The ratings are also sensitive to a change in the notes' notching, which could arise if Fitch changes its assessment of their non-performance relative to the risk captured in the VRs or their expected loss severity. For Additional Tier 1 issues this could reflect a change in capital management or flexibility, or an unexpected shift in regulatory buffers and requirements, for example. We expect to withdraw Vicenza's subordinated debt once we withdraw the bank's other ratings. SENIOR STATE-GUARANTEED SECURITIES Vicenza,Veneto Banca The notes' ratings are sensitive to changes in Italy's Long-Term IDR. If IntesaSP decides to cancel the guarantees on this senior debt, Fitch will no longer rate the notes based on the guarantee but might assign ratings based on IntesaSP's senior debt rating. The rating actions are as follows: Vicenza Long-Term IDR: downgraded to 'D' from at 'CCC'/RWE Short-Term IDR: downgraded to 'D' from 'C'/RWE Viability Rating: downgraded to 'f' from 'cc' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Long-term senior unsecured notes and EMTN programme: 'CCC'/'RR4' placed on RWP from RWE Short-term rating on EMTN programme: 'C' placed on RWP from RWE Subordinated debt: downgraded to 'C'/'RR6' from 'CC'/'RR5' State-guaranteed debt: affirmed at 'BBB' Veneto Banca State-guaranteed debt: affirmed at 'BBB' IntesaSP Long-Term IDR: affirmed at 'BBB'; Outlook Stable Short-Term IDR: affirmed at 'F2' Viability Rating: affirmed at 'bbb' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' DCR: affirmed at 'BBB (dcr)' Senior debt (including debt issuance programmes): affirmed at 'BBB'/'F2' Commercial paper/certificate of deposit programmes: affirmed at 'F2' Short-term deposits: affirmed at 'F2' Senior market-linked notes: affirmed at 'BBBemr' Subordinated Tier II debt: affirmed at 'BBB-' Subordinated upper Tier II debt: affirmed at 'BB' Tier 1 instruments: affirmed at 'BB-' AT1 notes: affirmed at 'B+' Intesa Sanpaolo Bank Ireland plc Commercial paper/short-term debt affirmed at 'F2' Senior unsecured debt: affirmed at 'BBB' Intesa Sanpaolo Bank Luxembourg, S.A. Commercial paper/short-term debt: affirmed at 'F2' Senior unsecured debt: affirmed at 'BBB' Intesa Funding LLC US commercial paper programme: affirmed at 'F2' Contact: Primary Analysts Francesca Vasciminno (IntesaSP, Vicenza, Veneto Banca) Senior Director +39 02 87 90 87 225 Fitch Italia S.p.A. Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Valeria Pasto (IntesaSP) Associate Director +39 02 879087 298 Manuela Banfi (Vicenza, Veneto Banca) Associate Director +39 02 87 90 87 202 Committee Chairperson Christian Scarafia Senior Director +44 20 3530 1012 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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