Morningstar DBRS Upgrades BPER Banca S.p.A.'s Long-Term Issuer Rating to BBB (high) From BBB; Changes Trend to Stable From Positive

DBRS Ratings GmbH (Morningstar DBRS) upgraded the credit ratings of BPER Banca S.p.A. (BPER or the Bank), including the Long-Term Issuer Rating to BBB (high) from BBB and the Short-Term Issuer Rating to R-1 (low) from R-2 (high). The trend on the Long-Term Issuer Rating changed to Stable from Positive. Morningstar DBRS confirmed the credit ratings on the Bank's Long-Term Deposits and Short-Term Deposits at BBB (high) and R-1 (low), respectively, as they are at the same level as the Republic of Italy. The Bank's Intrinsic Assessment (IA) is now BBB (high) while its Support Assessment remains SA3, meaning that timely systemic support is not expected. A full list of credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The upgrade of the credit ratings considers the Bank's sustained improvements in its earnings power mainly resulting from higher net interest income (NII) as well as a diversified revenue mix, stronger operating efficiency, and lower credit costs. Morningstar DBRS also notes that BPER has largely maintained its improved asset quality profile despite some deterioration mainly stemming from a slowdown in nonperforming exposure (NPE) disposals rather than an effective deterioration in risk parameters. The Bank's capital buffers have strengthened despite higher shareholder remuneration and higher regulatory headwinds, mainly concerning the first adoption of Basel IV framework.

The credit ratings continue to reflect BPER's well established and diversified franchise in Italy resulting from recent integrations as well as its adequate funding and liquidity position, which leverage the Bank's ample and granular customer deposit base and its adequate access to capital markets. The Stable trend incorporates Morningstar DBRS' view that BPER's profitability will likely remain adequate even in a lower interest rate environment, benefitting from its enhanced diversification toward fee-income businesses and cost savings from recent optimisation. BPER's current asset quality and capitalisation profiles provide comfortable buffers to withstand the heightened uncertainty associated with geopolitical and global trade tensions.

On 6 February 2025, BPER made a voluntary public all-share offer to buy Banca Popolare di Sondrio (BPS). The transaction is expected to be concluded by YE2025, subject to regulatory approvals. On 18 April 2025, BPER's shareholders' meeting approved the capital increase reserved for the offer. Morningstar DBRS will continue to monitor this transaction and the integration process if the offer is successful. In Morningstar DBRS' view, the transaction would be largely neutral to BPER's credit profile. Nonetheless, with this acquisition, BPER would strengthen its market position in Italy, particularly in the wealthiest regions in the north of the country, especially in Lombardy, creating opportunities for revenue and cost synergies in the medium-term leveraging on shared product factories as well as business optimisation. While the offer was neither solicited nor previously agreed upon, in Morningstar DBRS' view, the presence of Unipol Assicurazioni (Unipol), the same main shareholder in both banks, could facilitate the conclusion of the deal.

BPER's Long-Term Senior Debt and Long-Term Deposits are both positioned in line with Morningstar DBRS' BBB (high) sovereign credit rating of the Republic of Italy.

The Bank's IA of BBB (high) is positioned at the lower end of the Intrinsic Assessment Range. Morningstar DBRS sees it as unlikely that the Bank's IA would be above the sovereign credit rating, given its business concentration in the domestic market and its significant exposure to Italian sovereign bonds.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require an upgrade of the Republic of Italy's sovereign credit rating and BPER to further demonstrate its ability to maintain improved profitability while confirming its commitment to maintain adequate asset quality and capital buffers.

A downgrade of the credit ratings would result from a downgrade of the Republic of Italy's sovereign credit rating or in the event of a significant deterioration in the Bank's asset quality and/or underlying profitability.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Good/Moderate
BPER is the fourth-largest banking group in Italy with total assets of around EUR 142 billion at the end of March 2025. The Bank mainly provides traditional banking services to individuals and corporate entities, mostly small and medium-size enterprises, as well as corporate and investment banking, private banking, asset and wealth management, insurance, leasing, and factoring. BPER has material market shares in its home region of Emilia Romagna as well as in Southern Italy and Sardinia, and its market position has improved throughout Italy, especially in Lombardy, Liguria, and Tuscany, on the back of recent acquisitions. Unipol is the Bank's main shareholder, holding around 20% of its share capital, and plays a key role for its bancassurance business. With the acquisition of BPS, BPER would strengthen its market share by banking branches to 10% nationwide and 14% in Lombardy.

Earnings Combined Building Block Assessment: Good
BPER's profitability strengthened, reflecting higher NII and net fee and commission income as well as improved operating efficiency and lower cost of risk (CoR). In Morningstar DBRS' view, BPER's core earnings power will continue to stand at adequate levels even in a lower interest rate environment, benefitting from its diversified revenue mix and cost savings from recent optimisation. Revenue and cost synergies potentially arising in the medium term from the acquisition of BPS would help absorb a potential increase in loan loss provisions (LLPs) stemming from global trade tensions.

BPER reported a net attributable income of around EUR 443 million in Q1 2025, down 3% year-on-year (YOY) or up 43% YOY after excluding a capital gain of EUR 150 million from the partial sale of the Bank's NPE internal management platform in Q1 2024. The improvement was mainly driven by higher revenues, including trading income, as well as lower operating expenses and lower LLPs. Core revenues (NII and net fees) were up 1% YOY in Q1 2025, as loan growth and fees from wealth management, bancassurance, and traditional banking services more than compensated for NII pressure from lower interest rates. The Bank's cost-to-income ratio decreased to 49.5% in Q1 2025 (56% if calculated on core revenues) from 56% in Q1 2024 (66%). BPER's annualised CoR stood at 31 basis points (bps) in Q1 2025, down from the average CoR of 70 bps reported in the 2020-24 period.

Risk Combined Building Block Assessment: Good
BPER's stock of gross NPEs has reduced materially in recent years; however, it was up 8% from YE2024 to the end of March 2025 mainly because of a slowdown in NPE disposals. The Bank's gross and net NPE ratios stood at 2.6% and 1.2%, respectively, at the end of March 2025, slightly up from 2.4% and 1.1% at YE2024, also because of lower loans. Nonetheless, BPER's asset quality metrics compare well with domestic and European peers. Stage 2 loans (loans where credit risk has increased since origination) represented 8% of net loans at the end of March 2025, down from 10% one year earlier. The potential risk to BPER from the former Banca Carige's legal risks is manageable in Morningstar DBRS' view. Morningstar DBRS expects new NPE inflows to increase if trade tensions have significantly negative repercussions for economic growth and unemployment in Italy and Europe.

Debt securities made up 93% of BPER's EUR 31 billion financial assets at the end of March 2025, which largely consisted of sovereign bonds, mainly issued by the Italian government, while 76% of total financial assets were classified at amortised cost (AC). The fair value of the fixed-income securities at AC was lower than its carrying value; however, Morningstar DBRS does not expect these unrealised losses to materialise given BPER's sound liquidity position.

Funding and Liquidity Combined Building Block Assessment: Good/Moderate
Morningstar DBRS sees BPER's funding profile as solid, with its retail customer base accounting for most of its total direct funding. Despite some deposit outflows driven by corporate loan repayments and transfer into asset under management and administration, Morningstar DBRS calculated the Bank's net loan-to-deposit ratio at 97% at the end of March 2025, up from 94% at YE2024. BPER has no exposure to central bank funding and makes regular use of the repo market. The Bank maintains adequate access to capital markets, with around EUR 11 billion of debt securities issued at the end of March 2025, equivalent to 9% of total funding. BPER maintains a sound liquidity profile with a counterbalancing capacity of around EUR 29 billion at the end of March 2025, of which more than EUR 23 billion was unencumbered, as well as a liquidity coverage ratio of 166% and a net stable funding ratio of 134%.

Capitalisation Combined Building Block Assessment: Good/Moderate
BPER's capital position has strengthened in recent years as earnings accumulation coupled with issuances accounted for capital purposes have more than offset the increase in risk-weighted assets stemming from acquisitions, business growth, and regulatory headwinds, despite higher shareholder remuneration. At the end of March 2025, the Bank reported a CET1 ratio of 15.8% and a Total Capital ratio of 20.6%, almost flat compared with YE2024 despite the Basel IV impact, but up from 14.5% and 18.1%, respectively, at YE2023. The current capital ratios provide solid buffers of around 690 bps for CET1 ratio and 720 bps for Total Capital ratio over the supervisory requirements, despite higher requirements for 2025. In May 2025, BPER paid around EUR 850 million of dividends, equivalent to 61% of net income reported in 2024, up from a payout ratio of 28% one year earlier. Morningstar DBRS expects the Bank's capital ratios to remain solid even after its potential acquisition of BPS and despite its targeted increase in shareholder remuneration to a payout ratio of 75%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/455627.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
The following Social (S) and Governance (G) factors had a significant effect on the credit analysis: Pass-through Social and Governance credit considerations. The Social and Governance factors affect BPER as the ESG factors for the Republic of Italy are passed through to BPER.

These S and G factors are new and were not present in the prior credit rating disclosure.

Credit rating actions on the Republic of Italy are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Republic of Italy are discussed separately at https://dbrs.morningstar.com/issuers/17689.

There were no Environmental factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) https://dbrs.morningstar.com/research/454196.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 May 2025) https://dbrs.morningstar.com/research/454637. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies

The sources of information used for this credit rating include Morningstar, Inc. and company documents, BPER Q1 2025 Results Press Release, BPER Q1 2025 Results Presentation, BPER Q1 2025 Report, BPER 2020-2024 Annual Reports, and BPER 2024 Pillar 3 Report. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/455628.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Andrea Costanzo, Vice President - European Financial Institution Ratings
Rating Committee Chair: Marcos Alvarez, Managing Director - Global Financial Institution Ratings
Initial Rating Date: 28 July 2022
Last Rating Date: 4 November 2024

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