DBRS Downgrades Creval; Places Ratings Under Review with Negative Implications

DBRS Ratings Limited (DBRS) lowered Credito Valtellinese SpA’s (Creval or the Bank) Long-Term Issuer Rating as well as its Long-Term Senior Debt and Long-Term Deposits ratings to BB from BB (high). Concurrently, the Bank’s Intrinsic Assessment (IA) was lowered to BB from BB (high), whilst the support designation was maintained at SA3. As part of this rating action, the Bank’s subordinated debt was downgraded to B (high) from BB (low). At the same time, DBRS placed Creval’s ratings Under Review with Negative implications. A full list of ratings actions is included at the end of this press release.

The rating action is due to weaker than expected third quarter results as of September 2017, the implications for the Bank’s capital position, and the challenges associated with the planned capital increase. In Q3 17, Creval reported a net loss of EUR 208 million following the introduction of new credit policies which resulted in additional provisioning costs of EUR 185 million. At end-September 2017, the Bank’s capital buffers deteriorated with the CET1 and total capital ratios down to 9.4% and 11.3% respectively from 10.5% and 12.5% in Q2 2017. This leaves a buffer of just 5 basis points (bps) over the Bank’s minimum SREP Total Capital requirement.

The review with negative implications also reflects the challenges and the risks associated with the capital increase announced by Creval. With the publication of the Q3 17 results, on November 7, 2017, Creval announced a plan to increase its capital with a rights issue of up to EUR 700 million. The additional capital is expected to increase the Bank’s provisioning levels and accelerate the process of scaling back the large stock of non-performing exposures (NPEs). In particular, as part of a new business plan for 2018-2020, the Bank expects a reduction in NPEs by approximately EUR 2 billion mainly via disposals and securitisations in 2018. As a result, the Bank is targeting a reduction in its gross NPE ratio to 10.6% in 2018 (9.6% in 2020) from the current very high level of 21.1% at September 2017, whilst the net NPE ratio would stand at 4.2% in 2020 with a total cash coverage of 59.1% in 2020.

The capital increase would allow Creval to improve its risk profile in line with the current best practices in the Italian banking sector. However, DBRS considers the transaction entails a significant execution risk, given the size of the rights issue which is approximately four times bigger than the Bank’s current market capitalisation, based on market data as of 15 November 2017. An inability to execute this transaction could increase the risks faced by the Bank’s bondholders.

The rights issue is expected to be approved in December 2017 and launched in February 2018 subject to market conditions. The transaction is supported by a pre-underwriting agreement with Mediobanca, which is in line with market practices for similar transactions.

RATING DRIVERS
The review with negative implications reflects DBRS’ view that Creval’s ratings may be downgraded should the Bank face challenges in executing the capital raise. During the review, which is typically resolved within a 90-day period, DBRS will monitor any progress of the Bank’s capital plan including investor sentiment and market conditions.

The Grid Summary Grades for Credito Valtellinese SpA are as follows: Franchise Strength – Moderate; Earnings Power – Weak; Risk Profile – Weak; Funding & Liquidity – Moderate; Capitalisation – Very Weak.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Nicola De Caro, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG - Global FIG
Initial Rating Date: February 7, 2013
Most Recent Rating Update: July 14, 2017

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