OREANDA-NEWS. Fitch Ratings has revised UBI Banca's (UBI) Outlook to Negative from Stable, while affirming the Long-term IDR (IDR) at 'BBB'. A full list of rating actions is available at the end of this rating action commentary.

The rating actions follow a periodic review of the bank. The Long-term IDR is driven by the standalone financial strength of UBI as expressed by its Viability Rating (VR).

KEY RATING DRIVERS
VR, IDR AND SENIOR DEBT
The ratings of UBI reflect its respectable domestic franchise as a second tier bank, particularly in northern Italy, and adequate funding and liquidity. However, the Outlook revision reflects weakening asset quality, modest earnings and capital being increasingly at risk from unreserved impaired loans.

As one of the largest second tier banks, UBI benefits from a sound customer funding franchise. However, on the asset side, UBI's ability to generate earnings remains weak as it has less pricing power than its larger domestic peers. Further the overwhelmingly long-term profile of its loan book limits scope to benefit from loan repricing.

Impaired loans totalled 15% of gross loans at end-2015, up slightly from 14% at end-2014. While the figure is below-average in Italy, reflecting UBI's operations in wealthy northern Italy, it compares weakly internationally. Coverage of impaired loans at just above 30% at end-2015 continues to compare weakly with domestic and even more so with international peers. Although coverage at UBI should be placed in the context of its abundant collateral backing impaired loans, collateral values remain sensitive to asset prices and the ability of Italian banks to monetise collateral in a timely manner remains limited.

In our opinion the bank's relaxed attitude towards reducing impaired exposures meant that the bank has not been able to trim down its stock of impaired loans. Similarly to other banks in Italy the group's strategy of impaired loan management is biased towards a gradual workout to protect collateral values, which, however, prevents more meaningful reductions in outstanding stocks.

UBI's capital ratios were acceptable at end-2015, with a Fitch Core Capital (FCC) ratio close to 14%, an estimated fully-loaded CET1 ratio of above 11.5% and a leverage ratio of 6%. However, unreserved impaired loans make up the entirety of bank's capital. Monetising these loans remains uncertain given the long lead time of recoveries in Italy.

SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
The SR and SRF 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 require senior creditors participating in losses, if necessary, instead of or ahead of a bank receiving sovereign support.

RATING SENSITIVITIES
VR, IDR AND SENIOR DEBT
The bank is sensitive to the operating environment in Italy, particularly to the success of recent initiatives aimed at addressing Italian banks' asset quality. Fitch expects to review UBI's ratings before end-2016 to assess progress on all the relevant factors affecting its VR.

UBI's ratings could be downgraded, potentially by more than one notch, if the bank does not step up efforts to materially reduce its stock of impaired loans in the next few years. This will be key to reducing the bank's capital at risk from unreserved impaired loans to levels that are more commensurate with the 'bbb' rating level. UBI's ratings are also sensitive to collateral valuation given the bank's low impaired loan coverage, which Fitch expects will be subject to review under the forthcoming EBA stress-test exercise. Sudden and unexpected liquidity tensions would put the ratings under pressure.

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 UBI. While not impossible, this is highly unlikely, in Fitch's view.

The rating actions are as follows:

Long-term IDR: affirmed at 'BBB'; Outlook revised to Negative from Stable
Short-term IDR: affirmed at 'F3'
Viability Rating: affirmed at 'bbb'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior debt (including programme ratings): affirmed at 'BBB'/'F3'