September 28, 2017 / 9:06 AM / a year ago

Fitch Rates Banca IFIS 'BB+'; Outlook Stable

(The following statement was released by the rating agency) MILAN/LONDON, September 28 (Fitch) Fitch Ratings has assigned Banca IFIS S.p.A. (IFIS) a Long-Term Issuer Default Rating (IDR) of 'BB+' with a Stable Outlook and a Viability Rating (VR) of 'bb+'. A full list of rating actions is at the end of this rating action commentary. IFIS is a small Italian bank, which provides a range of financial services to SMEs and it is among the largest buyers of consumer non-performing loans (NPLs) in Italy. KEY RATING DRIVERS IDRS AND VR IFIS's IDRs and VR reflect Fitch's view that the adequate franchise of the bank in niche businesses has allowed it to generate sound profitability. The ratings also reflect rapid growth as IFIS has expanded into new businesses over the past five years, as well as its sound capitalisation and leverage that are maintained with satisfactory buffers over regulatory minimum requirements. The VR further factors in IFIS's weak asset quality indicators by international standards and limited diversification of funding sources. IFIS maintains adequate domestic franchises in niche businesses. Its company profile is specialised but diversified; however, its business model - has been less stable in recent years as the bank expanded rapidly into new markets. The bank provides factoring services, where it has a long track record, and other financial services to SMEs; since 2012 it has been expanding in the domestic NPL market by becoming a leading buyer in the consumer segment. Management has, in our opinion, adequate depth, stability and experience and is commensurate with the group's business profile. Corporate culture is consistent and effectively supports business development. IFIS's growth strategy aims to widen the range of products offered to the bank's SME client base and, as such, strategic objectives can shift based on market opportunities. In our opinion, underwriting standards are in line with industry practices and the bank's risk control framework is robust. However, the bank's history of rapid business growth, which we expect to continue over the next three years, has resulted in balance sheet and business expansion that have often exceeded internal capital generation. IFIS's gross impaired loans (adjusted for the NPL purchase business) accounted for a high 18.6% of gross loans at end-1H17, which is broadly in line with domestic averages but weak by international standards. Coverage is stronger than at other rated Italian banks and the industry average. While we do not expect deterioration in asset quality stemming from the newly acquired leasing and corporate banking businesses, future growth in these segments could expose the group to increased credit risk. IFIS has generated sound operating performance in recent years, which was better than the domestic sector average. Although we expect IFIS to continue to generate sound revenue, operating margins are likely to come under pressure from increasing competition in its business segments. The bank's CET1 and total capital ratios, at 14.8% and 15.6%, respectively, are maintained with satisfactory buffers over regulatory minimum requirements. IFIS's Fitch Core Capital (FCC) ratio is also satisfactory, at 17.8% at end-1H17. Capitalisation is underpinned by healthy internal capital generation, moderate dividend pay-out and low capital encumbrance by impaired loans although Fitch views the absolute size of its capital base as limited. IFIS funds its activities mainly through customer deposits with limited access to wholesale funding. In 1H17 the bank issued a EUR300 million senior bond and announced its first EMTN programme with the aim of diversifying its funding sources in view of the planned business growth. ECB funding utilisation is contained. The bank expects its loan-to-deposit ratio, around 130% at end-1H17, to increase to above 140% in the next two years, signalling increasing reliance on wholesale funding. We view IFIS's liquidity as being in line with the bank's rating, and the liquidity coverage ratio is maintained with ample buffers over regulatory minimum requirements. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) 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. RATING SENSITIVITIES IDRS AND VR Growth, including through further acquisitions or rapid expansion in new businesses, could put ratings under pressure. Ratings would also come under pressure if the bank increases its risk appetite resulting in volatility in the bank's balance sheet or operating performance. The ratings would be downgraded if the bank's loan book quality materially deteriorates, which could be caused by entering new NPL segments where the bank lacks expertise or by an expansion of corporate lending or into other new businesses. Capital erosion following business growth or losses would negatively affect the ratings as would deterioration in the bank's funding and liquidity, which could result from excessive reliance on wholesale funding. Fitch expects that the newly acquired Interbanca businesses will positively contribute to the group's earnings in the coming quarters. Failure to generate adequate performance from these businesses could affect the ratings. Upward momentum for the rating would require a successful integration of the newly acquired businesses and the stabilisation of the bank's business model, which we expect will take some time. SUPPORT RATING AND SUPPORT RATING FLOOR 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 IFIS. While not impossible, this is highly unlikely, in Fitch's view. The rating actions are as follows: Long-Term IDR assigned at 'BB+', Outlook Stable Short-Term IDR assigned at 'B' Viability Rating assigned at 'bb+' Support Rating assigned at '5' Support Rating Floor assigned at 'No Floor' Contact: Primary Analyst Gianluca Romeo Director +39 02 87 90 87 201 Fitch Italia S.p.A. Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Valeria Pasto Associate Director +39 02 879087 298 Committee Chair 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 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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