Fitch Places Banca Monte dei Paschi di Siena on Rating Watch Evolving
The rating actions follow the announcement by MPS of its plans to dispose of its entire stock of doubtful loans (sofferenze) and to increase capital by up to EUR5bn through a new share issue, which it expects to close by end-2016.
The RWEs reflect Fitch's expectation that the bank's Long-Term IDR, VR and debt ratings could be upgraded if the transaction is completed successfully, but also that failure to do so will increase the risk of the bank failing and losses being imposed on junior and senior creditors, either in a resolution or a distressed debt exchange. The downgrade of the VR reflects Fitch's view that the decision to materially accelerate the reduction of MPS's large stock of impaired loans has increased the risk of failure by crystallising valuation losses on the bank's impaired loans.
KEY RATING DRIVERS
IDRS, VR AND SENIOR DEBT
MPS's Long-Term IDR and senior debt is rated one notch above the VR to reflect Fitch's view that the probability that senior creditors will have to bear losses is lower than the probability of failure for the bank. This is primarily because we believe that a failure of the bank if the capital increase does not go ahead would not necessarily result in losses for senior creditors if a solution is found that involves junior creditors.
The VR reflects the very weak asset quality of MPS and the pressure this puts on its capital, which recently led the European Central Bank (ECB) to impose an accelerated disposal of its portfolio of impaired loans. This will result in material additional provisions, leading to losses and the need for further capital. Gross impaired loans at end-June 2016 accounted for just over one-third of gross loans, and net impaired exposures (sofferenze and unlikely-to-pay exposures) accounted for a very high 250% of Fitch Core Capital at the same date.
MPS's ratings also reflect Fitch's view that funding and liquidity should benefit if the transaction goes ahead but could otherwise be vulnerable to market sentiment. The bank suffered moderate deposit outflows in the first months of 2016, and the saw further outflows in July 2016 after the ECB asked for an accelerated disposal of its impaired loans. Despite these outflows, the bank's deposit base remains large and liquidity position has been managed through effective contingency management.
The RWE reflects Fitch's view that MPS's ratings could be upgraded or downgraded depending on whether the announced transaction goes ahead as planned or not. Fitch sees material execution risks related to the disposal of impaired loans and the capital increase because of the complexity of the transactions. If the transaction does not go ahead, MPS's ratings would likely be downgraded due to a real possibility of the bank becoming non-viable and that junior and senior creditors could face losses in a resolution or debt exchange.
If the transaction is completed, the announced disposal of the bank's entire EUR27.7bn portfolio of gross doubtful loans ('sofferenze', the highest-risk category of classified exposures; EUR9.2bn net) would significantly reduce the size of impaired exposures to a more acceptable 12% of gross loans from just over a third and improve the bank's asset quality. Impaired loans, at least initially, would be almost entirely composed of unlikely-to-pay exposures whose inherent risk is significantly lower than that of doubtful loans. MPS also had around EUR2.1bn of gross past-due loans on its books (EUR1.6bn net) at end-June 2016, which are not included in Fitch's definition of impaired loans.
MPS expects the disposal of the doubtful loans to result in around EUR1bn loan losses caused by the decision to increase the coverage of doubtful loans to 67% ahead of the transaction (from 61% of end-June 2016). In addition, the bank expects a EUR1.6bn loss from assigning the equity tranche of the doubtful loan portfolio to its shareholders, effectively in the form of a spin-off of the equity portion, to achieve the full deconsolidation of the portfolio from its balance sheet. MPS also expects EUR2.2bn of additional loan impairment charges related to the planned increase of the coverage on unlikely-to-pay and past-due exposures to 40% from around 30% at end-June 2016, which means any future migration from these to doubtful exposures should have a more manageable impact on the income statement.
MPS plans to cover the losses generated by the transaction with a capital increase of up to EUR5bn to be completed before end-2016, which has been pre-underwritten by a consortium of investment banks but which is conditional upon the successful implementation of the doubtful loans securitisation. Although the bank's CET1 ratio after the transaction should remain overall unchanged at just above 11%, in Fitch's opinion the bank's capitalisation would be stronger at that point as the weight of net impaired exposures on capital would significantly decrease.
MPS announced that the securitisation of the doubtful loans will be structured through a special-purpose vehicle (SPV), which the bank expects to be funded with the issue of EUR6bn senior notes that should benefit from a government guarantee; EUR1.6bn of mezzanine notes expected to be underwritten by the Atlante fund; and EUR1.6bn of junior notes to be allocated to MPS's shareholders.
The Short-Term IDR has been placed on Rating Watch Negative (RNW) rather than on RWE because an upgrade would, under Fitch's mapping of the two IDRs, require an upgrade of the Long-Term IDR to at least 'BBB-', which we do not expect.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SR and SRF reflect Fitch's view that 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
Legacy lower and upper tier 2 securities are notched down once from MPS's VR to reflect non-performance risk equating to a bank's failure risk associated with a 'ccc' VR and above-average loss severity in the event of failure.
The ratings of the Tier 1 instruments and preferred securities reflect their non-performance and Fitch's expectation that the securities are unlikely to resume coupon payments in the near future.
SENIOR STATE-GUARANTEED DEBT
The Long-term rating of MPS's 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 6 December 2011, n.201, subsequently converted into Law 22 December 2011, n. 214.
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.
RATING SENSITIVITIES
IDRS, VR AND SENIOR DEBT
If the disposal of impaired loans and the capital increase are completed successfully, MPS's creditworthiness would improve, leading to an upgrade of VR, IDR and senior debt ratings, potentially by more than one notch.
If Fitch concludes that the transaction would have caused the bank's failure absent extraordinary support from shareholders to address a material capital shortfall, MPS's VR would be downgraded to 'f' immediately before being upgraded to the level reflecting the bank's profile following the capital increase. This could be the case, for example, if MPS's asset quality deteriorates further before the transaction is completed or if earnings or liquidity deteriorate materially.
An upgrade would primarily reflect improved asset quality and lower pressure on capital from net impaired exposures as well as reduced risk of further pressures on funding. The extent of the upgrade will depend on the bank's capitalisation and asset quality after the transaction, on the bank's business profile after the transaction and the bank's earnings potential, and on the strategic objectives included in the bank's new business plan. We expect that after completion of the transaction the bank will have to demonstrate its ability to implement its new strategy, and we expect that improvements in earnings driven by the new strategy will be gradual.
Failure to dispose of the doubtful loans or to achieve the capital increase would likely result in a downgrade of MPS's VR to reflect increased failure risk. MPS's VR could be downgraded to 'f' and the Long-Term IDR and senior debt ratings to a level commensurate with our view of heightened risk of senior creditors bearing losses in a resolution of the bank.
Fitch expects to resolve the RWE once we are able to fully assess the likely outcome of the planned transactions. Although the bank plans to close the transaction by end-2016, a resolution of the RWE could take longer than the typical six-month period if these plans are delayed.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings are primarily sensitive to a change in the VR, but also to a change in Fitch's view of incremental non-performance risk or loss severity. If the transaction goes ahead, the ratings of performing subordinated securities would likely be upgraded to reflect lower incremental non-performance risk. The Tier 2 instruments are sensitive to changes in Fitch's expectation of loss severity.
The ratings of Tier 1 instruments and preferred securities would be upgraded if they return to performing.
SENIOR STATE-GUARANTEED DEBT
The state-guaranteed debt ratings are sensitive to changes in Italy's Long-Term IDR or to changes in Fitch's expectation that the sovereign would honour its obligation. A downgrade or an upgrade of Italy's Long-Term IDR would be reflected in the notes' Long-term ratings.
SR AND SRF
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 MPS. While not impossible, this is highly unlikely, in Fitch's view.
The rating actions are as follows:
Long-Term IDR: 'B-'; placed on RWE
Short-Term IDR: 'B' placed on RWN
Viability Rating: downgraded to 'ccc' from 'b-'; placed on RWE
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Debt issuance programme (senior debt): 'B-'/'RR4'; placed on RWE
Senior unsecured debt: 'B-'/'RR4'; placed on RWE
Lower Tier 2 subordinated debt: downgraded to 'CC' from 'CCC'/ 'RR5'; placed on RWE
Upper Tier 2 subordinated debt: 'CC', revised to 'RR5' from 'RR6'; placed on RWE
Preferred stock and Tier 1 notes: affirmed at 'C'/'RR6'
State-guaranteed debt (IT0004804362): affirmed at 'BBB+'
Комментарии