OREANDA-NEWS. Fitch Ratings has downgraded Banca Nazionale del Lavoro's (BNL) Viability Rating to 'bb+' from 'bbb-'. The Long-term Issuer Default Rating (IDR) has been affirmed at 'A-', and the Short-term IDR at 'F1'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS - IDRs, SENIOR DEBT AND SR
The IDRs and Support Rating (SR) reflect institutional support from BNL's parent, BNP Paribas (A+/Stable). Fitch considers BNL as core to BNP Paribas' strategy as Italy is a home market for the French group. BNL's IDRs and SR are capped at one notch above Italy's sovereign rating 'BBB+'. This reflects the agency's view that BNP Paribas' propensity to support BNL is linked to Italy's operating environment, since this affects the attractiveness of BNL to the group and BNL's impact on the group's financial profile.

VR
The downgrade of BNL's VR is driven by material deterioration in the bank's asset quality in 2015 and by high capital encumbrance. Impaired loans grew 9% in 2015 (on a like for like basis) and accounted for a high 19% of gross loans, despite the disposal of a sizable portfolio of impaired loans in December. The coverage of impaired loans was an adequate 54%, a level which compares well with Italian peers, and partly reflects the high proportion of BNL's lending to the corporate sector where collateral coverage tends to be lower.

Despite acceptable capital ratios, with a reported CET1 ratio of 11.4% at end-2015, capital encumbrance is high, with unreserved impaired loans accounting for over 100% of Fitch Core Capital (FCC).

The VR also reflects BNL's weak earning generation capabilities. The bank reported a small operating profit of EUR35m in 2015 (0.6% of operating ROAE), having been loss-making in 2014, but profitability continues to be burdened by high loan impairment charges and operating costs.

BNL's liquidity benefits from ordinary support from its parent and is consistently sound, and market risk exposure is low.

RATING SENSITIVITIES
IDRs SENIOR DEBT AND SR
BNL's IDRs and SR are sensitive to a change in Italy's sovereign rating or to a change in Fitch's assessment of BNP Paribas' propensity and ability to provide support to its subsidiary. A downgrade of BNP Paribas' IDRs will only affect BNL's IDRs and SR if the parent's Long-term IDR is downgraded by more than two notches. The Short-term IDR may come under pressure if short-term liquidity support from its parent weakens, which Fitch currently does not expect.

VR
BNL's VR will come under further pressure if asset quality continues to materially deteriorate in 2016 or if losses erode capitalisation significantly. An upgrade of BNL's VR is contingent on a material reduction in the stock of impaired loans and lower capital encumbrance.

The rating actions are as follows:

Long-term IDR: affirmed at 'A-'; Outlook Stable
Short-term IDR: affirmed at 'F1'
Viability Rating: downgraded to 'bb+'
Support Rating: affirmed at '1'
Senior debt: affirmed at 'A-'