BANCA MONTE DEI PASCHI DI SIENA S.P.A.
Fitch Ratings has upgraded
The Outlook on the Long-Term IDR is Stable. A full list of rating actions is detailed below.
The upgrade reflects the bank's strengthened capitalisation following an
The upgrade also considers a reduced stock of impaired loans and lower capital encumbrance by their unreserved portion since MPS completed its asset-quality clean-up. We expect the cost reductions in combination with rising interest rates to lead to higher and more sustainable profitability and more than offset the impact from expected deterioration in the operating environment in
Key Rating Drivers
Turnaround in Progress: MPS's ratings reflect the bank's capitalisation remaining vulnerable to execution risks on its commercial relaunch and pending legal claims. They also reflect many years of limited financial flexibility that have hindered its commercial effectiveness and resulted in weak, although improving, profitability to date. The ratings are underpinned by asset-quality metrics that are in line with the sector average and stabilised customer funding.
Limited Business Generation: MPS's decade-long restructuring and tight capitalisation have constrained its ability to originate business and to remain competitive. The freshly injected capital should enhance commercial capabilities but improvements will take time to materialise since the bank has to restore its franchise given weakened client relationships and lacks pricing power compared with large domestic peers.
Revised Strategy, Execution Risks: MPS's revised strategy envisages a greater retail focus, the in-sourcing of consumer-finance activities and maintaining long-dated partnerships with leading insurance and wealth-management companies. These should underpin earnings generation and stability in the medium term, although executions risks remain.
Reduced Risk Appetite: MPS has been successfully containing impaired loans flows, including from expired moratoria, after it tightened its underwriting standards and improved risk control framework over the last five years. We also expect the bank to further shrink its exposure to Italian sovereign debt following the downsizing of its capital-markets activities. Legacy legal claims reduced materially over the past 18 months but remain large relative to peers'.
Asset Quality Under Control: MPS's impaired loan ratio of about 5.3% at
Improved Profitability Prospects: MPS turned profitable at operating level after 10 years of intermittent losses, due to structurally lower LICs, reduced cost of deposits and gradual recovery of business volumes. We expect that profitability will structurally improve due to rising interest rates and cost savings resulting from a reduction in full-time employees. However, MPS has yet to build a record of earnings generation that is sustainable throughout the economic cycle and its execution capabilities remain vulnerable to deteriorating economic prospects.
Strengthened Capitalisation: The completion of the
Common Equity Tier 1 (CET1) capital encumbrance by unreserved impaired loans is manageable at below 30%, also due to significant de-risking and we expect modest negative impact from possible asset-quality deterioration in 2023. However, capitalisation remains at risk from significant pending legal claims and large, albeit decreasing, holdings of Italian government bonds.
Stable Deposits, Uncertain Market Access: Customer deposits have stabilised and seen their cost reduced. The bank has to execute an ambitious funding plan by 2026 to comply with its minimum requirement for own funds and eligible liabilities (MREL). We expect the bank's improved credit profile to support its ability to access financial markets, although this could prove costly or sporadic based on market conditions.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings could be downgraded if the bank fails to structurally improve profitability and its impaired loans ratio increases above our expectations, resulting in large erosion of regulatory capital buffers, without prospects of recovery in the short term. Ratings pressure could also arise from large unexpected cost items, such as from pending legal claims or the bank's restructuring.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of MPS's ratings would require a combination of several factors, including the turnaround in the bank's profitability resulting in operating profit sustainably above 0.25% of risk-weighted assets (RWAs), an impaired loans ratio remaining below 5% and a CET1 ratio in line with MPS's medium-term target of about 14%. A rating upgrade would also depend on the bank restoring reliable market access to institutional funding while maintaining stable customer funding.
Rating upside would also be contingent on the operating environment in
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
DEPOSIT RATINGS
Long-term deposits are rated one notch above the Long-Term IDR because we expect MPS to comply with its MREL requirements over the medium term and that deposits will therefore benefit from the protection offered by junior bank resolution debt and equity resulting in a lower probability of default.
The short-term deposit rating of 'B' is in line with the bank's 'BB-' long-term deposit rating under Fitch's rating correspondence table.
SENIOR PREFERRED (SP) DEBT
SP obligations are rated in line with the bank's Long-Term IDR to reflect that the likelihood of default on any given SP obligation is the same as that of the bank. The Recovery Rating of 'RR4' reflects our expectations of average recovery prospects.
SENIOR NON-PREFERRED (SNP) DEBT
MPS's SNP debt is rated one notch below the bank's Long-Term IDR to reflect the risk of below-average recovery prospects, which correspond to a Recovery Rating of 'RR5'. Below-average recovery prospects arise from the use of more senior debt to meet resolution buffer requirements and from the combined buffer of Tier 2 and SNP debt being unlikely to exceed 10% of RWAs.
SUBORDINATED DEBT
MPS's subordinated debt is rated two notches below the VR for loss severity to reflect poor recovery prospects in a resolution. 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. Poor recoveries for subordinated bondholders in a resolution are also reflected in the notes' 'RR6' Recovery Rating.
Government Support Rating (GSR)
MPS' GSR of 'no support' (ns) reflects Fitch's view that although external extraordinary sovereign 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.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The SP, SNP and long-term deposit ratings are primarily sensitive to changes in the bank's Long-Term IDR, from which they are notched.
The long-term deposit rating could be downgraded by one notch on a reduction in the size of the senior and junior debt buffers, although we view this unlikely in light of MPS's current and future MREL requirements.
The SP and SNP ratings could be upgraded if the bank is expected to meet its resolution buffer requirements exclusively with SNP debt and more junior instruments or if SNP and more junior resolution debt buffers exceed 10% of RWAs on a sustained basis, both of which we consider unlikely.
The subordinated debt rating is sensitive to changes in the bank's VR, from which it is notched. It is 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 VR.
GSR
An upgrade of the GSR would be contingent on a positive change in the sovereign's propensity to support the bank. In Fitch's view, this is highly unlikely, although not impossible.
VR ADJUSTMENTS
The business profile score of 'b+' is below the 'bbb' category implied score because of the following adjustment reasons: business model (negative) and strategy and execution (negative).
The asset quality score of 'bb' is above the 'b' category implied score due to the following adjustment reason: historical and future metrics (positive).
The capitalisation and leverage score of 'b+' is below the 'bb' category implied score due to the following adjustment reason: internal capital generation and growth (negative).
The funding and liquidity score of 'b+' is below the 'bbb' category implied score due to the following adjustment reason: non-deposit funding (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on MPS, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, see www.fitchratings/esg.
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