OREANDA-NEWS. Fitch Ratings has downgraded ICCREA Holding's (ICCREAH) Long-term Issuer Default Rating (IDR) to 'BBB-' from 'BBB' and Viability Rating (VR) to 'bbb-' from 'bbb'. ICCREA Holding's two main subsidiaries, ICCREA Banca and ICCREA Banca Impresa's Long-term IDRs have also been downgraded to 'BBB-' from 'BBB' and common VRs downgraded to 'bbb-' from 'bbb'. The Outlooks on the Long-term IDRs are Evolving. Fitch has also downgraded the Support Rating of ICCREA Banca and ICCREA Banca Impresa to '5' from '2' and assigned them a Support Rating Floor of 'No Floor'.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS, VRs AND SENIOR DEBT
The downgrade predominantly reflects the increase in ICCREA group's impaired loans throughout 2015, despite new impaired loans formation being slower than in the recent past and the group's more conservative approach to impaired loan provisioning. Our assessment of ICCREA group's asset quality also considers that a large part of its business is related to Italy's mutual banks (Banche di Credito Cooperativo; BCCs) whose underlying credit profile further weakened in 2015.

The Evolving Outlook reflects that the upcoming reform of the Italian mutual sector, likely to be approved in the coming weeks, may significantly alter ICCREA's structure and operations. The reform could lead to a structure where all or part of BCCs and ICCREAH are consolidated into a joint-stock company structure, with strong policy-setting powers. The structure could benefit from the introduction of a well-structured mutual support scheme, similarly to cooperative banking groups that benefit from mutual support schemes in other EU countries. This may be beneficial for the ratings if it translates into enhanced corporate governance, performance and financial metrics.

The Italian authorities and national and regional federations have been discussing an overhaul of the Italian mutual sector, in order to improve access to the capital markets and strengthen support within the sector, since early 2015. However, a concrete project has failed to materialise to date. The commitment from the authorities and the sector to reach an agreement on a credible reform within a reasonably short time frame is strong. Fitch anticipates that as part of the upcoming reform, ICCREA group entities and BCCs will eventually be part of a single banking group, with potential downside risks related to consolidated asset quality. Also, there are risks related to the timely and efficient execution of this project, potentially putting further pressure on the group's ratings.

ICCREAH's IDRs and VR are equalised with the common VRs of its two main subsidiaries, ICCREA Banca and ICCREA Banca Impresa, reflecting that although ICCREAH is a pure holding company, the ICRREA group (ie including all its subsidiaries) is regulated as a consolidated entity; capital and liquidity is fungible across the group's entities and all entities share the same brand and operate in the same jurisdiction. ICCREA Banca and ICCREA Banca Impresa are part of the same group and have the common mission of serving the Italian mutual sector, albeit with different products and services. In addition, management of the group is centralised at ICCREAH, meaning that individual credit profiles cannot be meaningfully disentangled.

The common 'bbb-'VRs reflect the ICCREA group's key role within the Italian mutual banking sector, for which it acts as the largest central institution. The group provides products and services to around 360 BCCs, mainly through ICCREA Banca Impresa, which supplies corporate loans to the sector's clients, and ICCREA Banca, which is the sector's main liquidity and funding provider, including access to ECB funding. The group benefits from the sector's strong franchise and from access to funding and capital from the BCCs.

ICCREAH's capitalisation is sound, with a CET1 ratio of 12.4% and a FCC ratio of 13.7% at end-1H15. Capital ratios have strengthened largely because of internal capital generation and lower risk-weighted assets after the disposal of the equity stake in Istituto Centrale delle Banche Popolari Italiane. However, the burden of unreserved impaired loans remains very significant at over 70% of Fitch Core Capital, which is weak by international standards.

ICCREA Holding and its subsidiaries benefit from sound liquidity, which is supported by the BCCs placing their excess liquidity with ICCREA Banca.

SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch has downgraded the Support Rating of ICCREA Banca and ICCREA Banca Impresa to '5' from '2' and assigned them a Support Rating Floor (SRF) of 'No Floor'.

The '5' Support Ratings and SRFs of 'No Floor' assigned to the three entities reflect Fitch's view that senior creditors can no longer rely on receiving full extraordinary support from the sovereign in the event that a 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 resolving banks that requires senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

ICCREA Banca's and ICCREA Banca Impresa's Support Ratings previously reflected institutional support from within the group. The downgrade reflects that we do not generally assign institutional Support Ratings where we have common VRs and in the case of this group Fitch also takes note of the expected increasing integration. The downgrade of the Support Ratings has no effect on ICCREA Banca's and ICCREA Banca Impresa's Long-term IDRs and VRs.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The subordinated debt and other hybrid capital issued by ICCREA Banca and ICCREA Banca Impresa are notched down from the VRs in accordance with Fitch's criteria to reflect the different non-performance and relative loss severity risk profiles of these instruments.

The Subordinated Tier 2 debt issued by ICCREA Banca and the Lower Tier 2 debt issued by ICCREA Banca Impresa are rated one notch below the VRs, to reflect above average loss severity risk of these types of debt when compared to average recoveries.

. The Upper Tier 2 subordinated debt issued by ICCREA Banca Impresa is rated three notches below the VR to reflect higher loss severity risk of these securities when compared to average recoveries (two notches from the VR) and high risk of non-performance risk (one notch).

We have consequently downgraded them due to the downgrade of ICCREA Banca and ICCREA Banca Impresa's VRs.

RATING SENSITIVITIES
IDRS, VRs AND SENIOR DEBT
As the ratings are based on the ICCREA group's instrumental role for the mutual sector in Italy, the Evolving Outlook reflects Fitch's view that the upcoming sector reform could materially change ICCREAH's structure, operations, and financial profile, and therefore the execution of the group's restructuring could potentially have positive, negative or neutral impacts on the ratings.

Fitch's base case is that asset quality for the group has begun to stabilise, evidence of failure to do so in the coming quarters could lead to a downgrade.

SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade of the SR and upward revision of the SRF would be contingent on a positive change in the sovereign's propensity to support ICCREA group. While not impossible, this is highly unlikely, in Fitch's view.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
ICCREA Banca Impresa's subordinated debt ratings are broadly sensitive to the same considerations that might affect ICCREA Banca Impresa's VR.

The rating actions are as follows:

ICCREA Holding S.p.A.
Long-term IDR: downgraded to 'BBB-' from 'BBB'; Outlook Evolving
Short-term IDR: affirmed at 'F3'
VR: downgraded to 'bbb-' from 'bbb'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

ICCREA Banca S.p.A.
Long-term IDR: downgraded to 'BBB-' from 'BBB'; Outlook Evolving
Short-term IDR: affirmed at 'F3'
VR: downgraded to 'bbb-' from 'bbb'
Support Rating: downgraded to '5' from '2'
Support Rating Floor: assigned at 'No Floor'
EUR5bn EMTN Programme: Long-term rating downgraded to 'BBB-'from 'BBB'
EUR5bn EMTN Programme: Short-term rating affirmed at 'F3'
Senior unsecured debt: downgraded to 'BBB-' from 'BBB'
Subordinated Tier 2 notes: downgraded to 'BB+' from 'BBB-'

ICCREA Banca Impresa
Long-term IDR: downgraded to 'BBB-' from 'BBB'; Outlook Evolving
Short-term IDR: affirmed at 'F3'
VR: downgraded to 'bbb-' from 'bbb'
Support Rating: downgraded to '5' from '2'
Support Rating Floor: assigned at 'No Floor'
Senior unsecured debt and EMTN Programme: downgraded to 'BBB-' from 'BBB'
Subordinated lower Tier 2 notes (ISIN XS0287519663): downgraded to 'BB+' from 'BBB-'
Subordinated upper Tier 2 notes (ISIN XS0295539984): downgraded to 'BB-' from 'BB'